Whether you regard time as a steady continuum or stretchable elastic, as Einstein theorized, we all know that time is money. We often see organizations spend a lot of money without saving time, when they could have spent the same money, saved a lot of time and effort, and reached their growth goals much more quickly.
When it comes to creating equity value, growing a business faster, in less time, is generally worth more. If you’re a private-equity owner or a private-equity-backed CEO, with a five-to-seven-year holding period but unable to get the growth you want fast enough, you don’t need Newton to tell you that your returns and personal equity value will never make it out of gravity’s grip.
Acquisition is a standard engine used to drive growth. Common strategies include acquiring for geographic expansion, product extension, increased distribution, synergies, and straight-up price arbitrage—that is, buying a smaller company at a discount and rolling it into an entity carrying a higher multiple. In addition, a strategy that’s become increasingly popular recently is making an acquisition to bring an important technology into an organization, even for industries that seemingly have no tech connection whatsoever. Acquisitions certainly aren’t always successful, but there are proven ways to improve the odds.
At Stax, we routinely get calls from clients looking for last-minute due diligence relating to possible bolt-on acquisitions. They’re looking to understand a target acquisition’s market positioning, its competition, long-term customer needs and impressions—all to build a fact base as to whether this is a good investment or a bad one and whether it will work strategically—all in three to four weeks. We don’t mind these calls, as this is one of our specialties.
We can’t help thinking, though, that clients would have been better off starting the process by first prioritizing building the fact base to see which targets are the best, before diving into due diligence about one specific target.
One of Einstein’s many famous quotes is, “If I had one hour to save the world, I would spend 55 minutes defining the problem and only five minutes finding the solution.” Not that M&A is saving the world, but shouldn’t there be more upfront analysis for something that’s a potential strategic investment? Shouldn’t everyone have a deal on the radar screen with enough context to make this an even-paced diligence? Why not change the overall behavior, getting more input early on about which companies would likely make the best candidates, so efforts can be more targeted? And, when opportunistic deals present themselves, they can be put into context with other potential candidates. Knowledge is power.
The reluctance to invest in outside resources early seems to stem from several old-school problems.
Most organizations would save significant time and money over the long run by doing an intensive acquisition screening up front over four to eight weeks, and then doing light updates over time. Because potential acquisition candidates will have already been largely vetted for critical criteria before the formal acquisition process begins, all of your resources are better directed from the outset and you have a much better chance of hitting your targets—essentially accelerating growth. You’d also have more information about each company, avoid time with lesser candidates, ask better questions of the good ones, and spend less overall on the due diligence associated with each deal.
Stax has created a Fast Framework for acquisition screening that blends strategic thinking, a defined research approach, and execution with common sense to produce data-driven actionable results. The process includes steps companies need to make informed decisions.
Acquisition strategies are rarely short term, and they use a great deal of capital. The wealth of knowledge that an acquisition screen provides allows you and your team to better choose who you want and why. In the best scenarios, you call someone early with a better story and they realize that working with you will be an easy process, because you are well informed. Worst case, they put you on the list for when the auction comes around, and you have an information advantage over other potential bidders.
Seeing smart clients wait until they have a Letter of Intent to get a crash course on the level of interest of customers in the target brings up another Einstein lesson: “Insanity is doing the same thing over and over again and expecting a different result.” Stop the insanity. Accelerate your growth while lowering your total effort. You may not be able to bend time, but you can certainly use the time you have more effectively. Einstein would undoubtedly still consider that a smart thing to do.