Empire Builders' Tips to Acquiring Mid-market Businesses
Here are the characteristics of successful empire builders.
I spend most of my time working with "empire builders." These are guys or gals that have the desire, capability and charisma to build $100 million plus companies. More often than not, aggressively growing a company to this size requires an acquisition strategy to come into play at some point.
What is an acquisition strategy? I'll start by telling you what it's not. It's not a single transaction that you enter into because a competitor approaches your company looking for a retirement plan. It's not an opportunistic business acquisition presented to you by an M&A intermediary.
An acquisition strategy is a dedicated plan for targeted expansion into different regions, additions of new products/services and/or creation of economies of scope or scale. The ultimate goals of the acquisition strategy should be diversification of risk for the business and increased return on equity for its shareholders.
Many people don't have the skills, understanding or risk appetite to take on a dedicated acquisition program. But for those that do, here are common characteristics I have observed from working with successful empire builders.
Establish Price and Terms Quickly
Executing an acquisition can be a costly endeavor not only in terms of money but also time and organizational resources wasted in chasing unlikely opportunities. Empire builders find out quickly if a seller is serious about doing a deal. They do this by presenting an offer to the vendor soon after they identify the target as a fit. Initial offers are usually presented as an indication of interest(IOI) and are drafted as non-binding, so there is no legal obligation to close a transaction. The most important result from a quick offer is getting the conversation kickstarted around the most contentious issues: price and terms. From there, empire builders discern how realistic closing a deal really is. This is not to say that they rush to complete a deal. They just want to know that everyone at the table is committed to get the acquisition across the finish line.
Able to Source Lots of Potential Deals
To close lots of deals you have to review lots of deal. Empire builders are great at finding opportunities. Their charisma often leads to deals finding them, but they are also very active in the search. A simple strategy they employ is to tell everyone (customers, suppliers, advisors, et al) that they are in acquisition mode. A clear and specific set of criteria for target businesses will also help filter the search. Over time, an acquisition strategy becomes like a wet snowball rolling downhill; once you've completed a few deals to gain critical mass, higher quality deals will start coming to you. These opportunities are often business owners that want to join the vision of the empire builder, further advancing the acquisition strategy.
Understand Valuation and Deal Structuring
Understanding valuation and deal structuring is a must to skillfully complete an acquisition. There is no way to get around a deficiency in these competencies. Empire builders do not just turn to their staff, management consultants or investment bankers to figure this stuff out. The most famous dealmakers in history - Warren Buffett, Carl Icahn, George Soros - have built their wealth through mastery of deal execution, risk assessment and capital allocation.
Understanding the market value of an asset involves assessing risk and determine the potential free cash flows from operations. When these two variables are determined, it becomes a mathematical calculation.
Deal structuring, on the other hand, is the art that balances the desires of the buyer versus the objectives of the seller so that an agreement can be consummated. This requires an innate ability to build trust and find a solution to meet everyone's goals.
Use Other Peoples' Money
A lack of their own capital is never an excuse to go acquire a business that fits the company's growth objectives. They understand that capital is only a commodity or tool that will help achieve risk diversification and shareholder returns. The empire builders know that money, regardless of who it comes from, is all the same color and carries the exact same value. It does come in different forms, including senior debt, mezzanine debt or equity. Empire builders are concerned with the cost and terms that these different layers of capital bring. They always seek to understand how various forms of capital will impact return on shareholders' equity. As Richard Branson says: "Money is for making things happen."
Pay a Fair Price
One of my favorite Warren Buffet quotes is: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." Empire builders know that over-paying for an acquisition is the kiss of death. Business owners, in general, are overly optimistic creatures and that, in many ways, drives their success. Forecasts of target companies will often show wildly ambitious growth projections and M&A intermediaries will push hard to get the highest purchase price for their clients. Empire builders love doing deals, but they do not fall in love with any one deal. An "eleventh hour gut check" is always performed on each deal after due diligence is completed. This ensures that every thing that was assumed about the deal at the onset is still valid, most importantly the purchase price. If it isn't, the deal is killed regardless of time and money invested up to that point.
Are You a Builder of Empires?
Successful empire builders are characterized as charismatic individuals, but they also have the discipline, dedication and devotion to carry out their acquisition strategy. When approaching any deal: they establish price and terms quickly, are able to source lots of potential deals, intimately understand valuation and deal structuring, understand that all forms of capital is still all the same money, and are absolutely sure they're paying a fair price. So, do you think you have what it takes to be a successful empire builder too?