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Posted: October 10, 2012

Why you might want what the other guy’s got

Mid-market companies can benefit from an acquisitions strategy

Jon Wiley

Companies grow in one of two ways: organically and through acquisition. Organic growth is achieved through the normal course of operations. New customers are added from sales and marketing and expansion to new territories. New products and/or services are added through R&D, product extension and updates. Most companies are continually pursuing organic growth.

The alternative is growth by acquisition. At a time when organic growth may be slowed due to lack of discretionary spending, limited access to working capital and general uncertainty in the market, acquisition(s) might be worth consideration for many companies.

What are some of the reasons companies make acquisitions?

• Add customers: For some companies, the sales cycle to add new customers can be extremely long and expensive. I have worked with companies that have viewed growing customers by acquiring another business to be less expensive and more reliable than the normal sales and marketing approach.

• Add size: Size has its benefits. Larger companies can gain efficiencies from purchasing in larger quantities, operations in multiple regions, consolidating operations, etc. Another point to consider if the end goal for the company’s owners is a sale is that size will also attract more buyers. I have had worked with companies that made acquisitions specifically so they could hit a revenue/earnings target that would allow them to market to a much larger list of buyers when they were ready to sell.

• Broaden product/service line: This can be a way to add products or services that might be attractive to the company’s existing customer base. This is also a good way to limit the effects of seasonality on a company’s cash flow. Acquiring products that sell more when your products are at a low point can help keep business consistent throughout the year.

• Control supply chain: Acquiring a supplier can help to control costs, quality and availability of resources. If a disruption to your supply chain poses a large threat it might be a good strategic decision to consider buying and gaining control of a supplier.

Large companies that make multiple acquisitions typically have an internal group to source, negotiate and integrate these acquisitions. These large companies may also have cash set aside and stock to use for the purchases. Mid-market companies that might benefit most from an acquisition strategy many times are not active in the M&A space. They typically don’t have dedicated teams that can spend the time sourcing and negotiating deals and they often don’t have the available capital.

Investment banks have experience in managing the acquisition process. We can help set acquisition criteria, source potential transactions, assist in due diligence and negotiations and find capital for the purchase. Currently, there is a significant amount of capital to be put to use by companies that have strong growth prospects.

Growth by acquisition can be a valuable strategy if managed properly. These are not always easy transactions, and there are many hurdles to overcome for an acquisition to be successful, from paying the right price to integrating the new company post acquisition. But at a time when organic growth is limited for many companies and there is significant capital available to drive growth, it may be a good time to consider formulating an acquisition strategy.

Jon Wiley is a Managing Director in the Denver office of Hunter Wise Financial Group.  Hunter Wise is a national investment banking firm providing institutional financing, merger and acquisition, divestiture and advisory services, to middle market companies in a broad range of industries. Contact Jon at jwiley@hunterwise.com or 303-833-1131.

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