Demetriou: Growth through acquisitions requires attention to detail

Having acquired four companies in the past few years, it’s helpful to understand some important points along the way.

As a business grows and develops, there is sometimes a need for faster growth. Often this entails acquiring an existing business. If you haven’t walked this road before, it might turn out to be a minefield. Not only is it necessary, but in our opinion it is essential to have expert business advice in the form of a consultant, attorney and accountant, all three of whom are intimately familiar with acquisitions. There are nuances, processes and details to pay attention to when researching our target companies.

Acquisitions should be considered if, after careful financial, operational and corporate cultural analysis, it is believed that the acquired company contributes to the growth of the acquiring entity. A strategic acquisition cannot by itself increase revenue, cash flow, or profitability. It can also strengthen the buyer’s internal sales processes.

As our award-winning company approached its 30th anniversary, it could expand significantly. Management, shareholders and business advisors decided that the acquisition of one, two or three synergies would broaden our business base, add resources and open up new markets. Armed with the specific criteria of target companies we wanted to research, we started looking at companies available for sale.

Even before signing a non-disclosure agreement, a thorough due diligence of the potential acquiree should be carried out. Companies for sale, especially those represented by competent and well-known business brokers, will have detailed financial information, executive biographies, market segments in which the company operates, organizational charts and, of course, an asking price. If still interested, and after fulfilling a more detailed non-disclosure agreement, a much deeper dive into the company’s financial position, internal dynamics, marketing and sales processes, etc. is necessary.

The trend that we both recognized and questioned was that the seller’s discretionary costs were included in multiples of the asking prices. In our previous acquisitions, EBDITA results of 2.5x and 3.5x were largely average for lower-middle income companies (under $5 million in revenue). SDEs are basically pass-through items that owners pay for themselves.

The use of so-called “seller discretionary spending” should not be used as the basis for determining the asking price. The buyer should not be expected to pay an amount that is a multiple of the value of cars, boats, etc. of the current owner. An objective and fair selling price is calculated based on the revenue multiplier, EBIDTA or net income.

Once the deal is complete, your work begins in earnest. The changes that you considered in advance should now be implemented. But first, you must live the acquired company’s culture and evaluate how the changes will affect the overall performance, atmosphere, and ultimately the profitability of the combined company.

A successful acquisition is not only a growth tactic, but also a serious challenge to the management skills of employees. Evaluation must take place without rose-colored glasses. Are your managers able to work effectively with larger and more complex departments and staff? A word of caution: know when to hire more experienced managers and directors.

The acquisition process may seem intimidating, but when carried out by a skilled and experienced team, it can be the right move to expand, increase revenue, cash flow and profitability.

Greg Demetriou is the CEO of Lorraine Gregory Communications, a fully integrated marketing communications company. Jeffrey Bass is the founder and CEO of Executive Strategies Group, LLC, a business development, finance and management consultancy.

Add a Comment

Your email address will not be published.