By Tom Decosimo, CPA, ABV, ASA & Ben Doak
Recent economic conditions have resulted in a difficult growth environment for many businesses. In the days before the Great Recession, the rising tide of economic expansion was lifting any drifting boat making organic growth seem comparatively easy and many management teams and entrepreneurs satisfied with the results. Today, things are different. The tide fell in 2007, and signs that it is rising are weaker and more mixed than many businesspersons would prefer. In some industries, the rising tide of the first years of the millennium even became a rip tide.
In this environment, organic growth can be difficult. Coasting along with the economy today results, at best, in very slow growth or stagnation. It is often said that in business, as in life, the end of growth is the beginning of death. As such, entrepreneurs are seeking new ways to drive growth.
Corporate Development Options
Many large companies have sophisticated finance and corporate development departments to help management and the board of directors focus on growth strategies. These corporate development departments often help decide whether the growth strategy should focus on building or buying. With asset valuations still down in many sectors and organic growth proving difficult, many of these corporate development departments are focused on buying.
In large corporations, the corporate development department sets the acquisition strategy. The corporate development department may find potential targets, value them, perform operational and accounting due diligence, and work with the company’s deal team to close the transaction. The corporate development department is also involved in sourcing financing for the expansion, creating forecasts of post-deal financial performance, approaching potential lenders or equity investors, and negotiating new investments. After the deal, corporate development personnel can be involved in accounting for the transaction and in post-acquisition integration.
In highly fragmented industries, it is a particularly good time to consider transaction options. For many industries, organic growth is difficult right now, and values have yet to fully recover. Value can be thought of as the result of a cash flow times a multiple, and the multiple is a function of the perceived risk of the investment (more risk = lower multiple) and the expected growth of the investment (more growth = higher multiple). In some parts of the economy, cash flow expectations are still down, the perception of risk is up, and growth expectations are, for the most part, below their 2007 peaks. Many entrepreneurs see low market values as an opportunity to grow through acquisition. Operators capable of integrating acquisitions are finding ways to reduce the total costs of the combined enterprises, increase margins and create new opportunities to build value.
One thing that limits the ability of some entrepreneurs to perform acquisitions is the lack of an experienced corporate development department. One of the most challenging and satisfying engagements we perform at Decosimo involves acting as an outsourced corporate development department for small to mid-sized businesses that do not have all the capabilities of a complete in-house corporate development group. Many small- to mid-sized businesses are well-positioned to grow through acquisition, but the lack of a corporate development staff combined with a focus by the key managers and owners on day-to-day operations results in missed opportunities.
We can help these businesses determine a strategy that allows them to take advantage of current market conditions and expand their operations. We create financial models that help with decision making and the evaluation of the business plan, and we raise debt and equity capital. We can help find acquisition targets that are a strategic fit, value those targets, negotiate the price, perform due diligence, and close the deal. Our tax professionals can help minimize the tax bite of the new strategy and bring the buyer and seller closer together by minimizing the impact of taxes. After the transaction, we can perform acquisition accounting services and provide integration help.
Growth by acquisition can be a great way to expand, but the details involved sometimes seem overwhelming to entrepreneurs, who typically have an operating focus rather than a finance focus. In very large organizations, there is often an in-house finance staff to help the operators expand, but in the small- to mid-sized businesses that we typically serve, the operator can feel very much alone when it comes to creating an acquisition plan.
We Can Help
Let us be your partner in transforming your business through acquisition. We can tailor our role to provide just those services that involve skills your current team lacks, or we can walk you through the process from planning to closing. Contact Tom Decosimo to discuss how the Decosimo team can help.