Defining your M&A Strategy

Why do you go into business? Some may state their reasoning behind pursing a business venture is for monetary gain, or simply looking for a change to their current working situation. There is usually some reason for any business venture. These things do not simply fall out of the sky. Starting a business may seem like the hardest part, but actually, the most difficult part of any company is strategising a way to grow effectively. There are many avenues to choose, but having a well thought out M&A Strategy can take you farther than you might think. We will examine all you need to know about M&A Strategy so you can determine the right path for your needs.

What is an M&A Strategy?

First, you must understand what exactly an M&A Strategy is. Mergers and Acquisitions is what M&A stands for, so an M&A Strategy refers to the drive behind an idea in your business growth. What investors you will seek, objectives you want to achieve, and motivations behind your desire to grow all play in to an effective M&A Strategy.

Finding the right investors is what will set your M&A Strategy apart and essentially, there are 2 different types of investors you seek, depending on your goals.

Financial Buyers

These investors are those that acquire a business based solely on the financial end of proportionate cash flow. They want to make money from investing in companies and acquire those business based on how much financially secure they believe the investment to be. Financial buyers will hold a company in the stock market for a set amount of time and through careful planning, will let it go when appropriate to garner a larger profit.

Strategic Buyers

With a strategic buyer, motivations behind acquiring a business are not solely based on financial gain on the top end, but a growth strategy to further their own companies and advancements. These investors will acquire products and even other companies allow a strategic buyer to grow and in some cases reduce their level of competition. We see this often when a larger firm or corporation buys out a smaller entity in the same field. They can use that property to grow their own business, but it also reduces their competition within the field while bringing in new ideas from the business owner to advance the larger entity.

Strategic Rationales to M&A

M&A Strategies vary by company and overall goals, but can be broken down into 6 essential rationales that each business owner must determine before making a decision on how to proceed with their strategy.

Improvement of a Company’s Performance

Similar company goals can be a huge draw for companies looking to grow their business. Widening profit margins, reducing costs, and increasing the company’s reach are motivators for an effective M&A Strategy. Mergers with other companies that hold similar profit margins and values can grow both entities faster than each one acting alone.

Consolidation and Removing Excess Capital

Sometimes an M&A Strategy is based on the internal needs of a larger company. Companies regularly audit smaller entities of their full scope of business ventures and look to reduce ideas, products, services, or additional capital ventures that are not making a profit. Sort of cutting the fat routine in business.

Time to Market Improvement for Products

Time to market is a very important detail in any product launch. Each product must be carefully examined and the time it takes for a product to begin making money can be significant in certain instances. For smaller companies, time to market can be excessive leading to reduced profit margins and in some instances, a necessary product may not even make it to consumers hands if time to market becomes too much. Smaller companies tend to work with larger entities to improve this factor and bring their products to store shelves and ultimately into the hands of customers much faster than going it alone. Larger companies have more resources and the partnership is often great for both companies.

Acquiring Technologies, Resources, Products, and Expertise

Ideas for new products and services are everywhere and where it may seem that larger corporations have all the answers, they actually do not. Large corporations and big dogs in industry regularly seek out experts, products, new technologies, and various other resources to help grow their company further. Essentially, it is more cost effective to purchase the product from an inventor or owner than it would be to spend the time and effort researching and mimicking that technology.

Exploiting Economies of Scale

This sector of M&A Strategy can be confusing in certain ways and not all industries can qualify this particular area. Certain aspects of business can hold astronomical expense and businesses that are in certain industries choose to share those expenses with other, similar companies. For example, Audi, Porsche, and Volkswagen all produce luxury vehicles and many of the parts within these three companies are very similar. These three separate companies often work together through a specific agreement to help bolster the cost of new technologies in their vehicles that would be far too expensive for just one company to acquire.

Investing in Younger Companies Showing Huge Potential

M&A Strategies have various motivations but in essence, many larger companies will give back to up and coming businesses that seem to just need a little push. These businesses that show promise of profit can be acquired or invested in by the larger entity to help boost their earnings potential. Johnson and Johnson showed an example of this M&A Strategy when they purchased a little known company called DePuy. The orthopedic device manufacturer was certainly not struggling, but with the help of Johnson and Johnson were able to fast track their growth, increasing it at least 17% over the course of 12 years.

Not all companies are designated for acquisition through M&A Strategy. There are some key criteria that need to be addressed if you want to be attractive to larger companies or are looking for smaller companies to acquire. Most notably, companies that show substantial growth potential, have an amazing product or service, and industries that are on trend at the moment tend to be at the top of the list for M&A Strategy acquisitions. It takes a lot of research to have an effective M&A Strategy within any business, so carefully determine your motivation behind the strategy and companies that align with your goals.

Platinum Business Growth are expert M&A & Corporate Fundraising Advisors.

We would love have a chat to see how we can add value to your M&A or fundraising projects for lenders/investors or for borrowers/investees, please reach out to us here if you'd like to do.

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