Growth from Mergers and Acquisition

Thomas Taylor - Sunday, August 28, 2016

Mergers and acquisitions aren't just for big corporates, they can also help small businesses. Often the purchase price is based more on future performance than cash up front, so depending on circumstances, you probably have many more options that you would think.

M&A can be a very effective tool to help businesses grow if used correctly, but like any powerful tool, they can also be dangerous. Here are some top level considerations.

I mostly work with creatives and B2B services firms so apologies if that's not you. B2C and manufacturing have their own issues that I won't cover here but I know some great people in that space if you want a name.

There are three main reasons why creatives or a service firm might want to buy, or merge with, another business. To get access to customer contracts, great people or super efficient core processes. But for most services businesses and creatives the big considerations are usually a combination of the first two.

The first is getting access to clients. We all know how hard it is to go out and win new business from new customers, the cost of acquisition for that work is always much higher than the work that comes from existing happy clients.

An option might be to purchase a smaller firm that has some key clients, or perhaps merge with a firm of a similar size with complimentary clients. To be able to work out if this might be an option you need to know your cost of client acquisition (CAC) for new work from your existing clients, and for new work from new clients, plus the lifetime value of clients (CLV). Then run the same calculations for the potential new comrades. You can put a dollar value on your clients, and theirs, as well as looking carefully at their selling processes to see if there are any potential economies of scale. Client acquisition functions can be expensive to run and this potential strategy should always be in your toolkit.

For a lot of services firms, sales are done by the senior professionals but there are still a lot of marketing and sales support costs. As you know there is a great variance in the quality of B2B marketing so it's often a quality assessment as well as just the dollars but the ultimate test of sales and marketing efficiency is cost of acquisition (CAC). It can also take time to build these functions well, perhaps even a year or two so it might be a way to jump start it.

The second reason, good people, is sometimes the most compelling. Good people don't leave good organisations if they are growing, appreciated, respected and well paid. Good organisations, even small ones, have employee retention schemes and even employee shares. It can be an expensive thing to entice good people from an organisation they like.

There has been a lot written over the years about the failure of lots of mergers because of cultural differences but if you have built what you think is a great culture, and you think the other people are good people that would fit in, you are probably well ahead of the pack.

When you find yourself in this situation of considering cultural fit make sure you find out what it is that people like, and dislike, about where they are. It's sad to see an acquiring company pay lip service to keeping the good parts of another organisation and then bulldozing straight over the top of it after the fact. I suspect this sort of thing is common and the source of many a failure. Think of it as an opportunity to refresh your culture and make it stronger. We always have things to learn.

You should be able to calculate the cost of acquiring new staff, don't forget that you often need to pay over the odds to entice good people to leave a place where they are engaged and performing well.

Conversely, you have the option of joining with a bigger fish.

So many choices.... happy hunting.

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