|Authored by Joseph Feldman|
This article is the first in a 3-part series dedicated to acquisition strategy, and authored by Joseph Feldman, President of Joseph Feldman Associates. More info on Joseph can be found by scrolling below.
Acquisitions are among the most far-reaching, ambitious business decisions that senior executives may face in their leadership of a company. For chief financial officers, a company’s decision to pursue growth through acquisition raises challenges related to analysis, financing, resource allocation, due diligence, risk mitigation, and integration planning. Acquisitions also present expectations and opportunities for the company’s chief financial officer to identify areas of greatest potential value, connect with potential equity and debt sources, and assure appropriate investment in deal vetting and integration planning.
What are the essential deliverables for
CFOs when it comes to acquisition strategy?
“An acquisition strategy is an outgrowth of the overall business strategy. If the business strategy is not clear then the acquisition path is very risky.” Middle market executive
Beyond a CFO’s responsibilities for financial reporting and controls is support for forward-looking investments. Investments in marketing programs, sales team expansions, new market entries, or capital expenditures will require a CFO’s guidance regarding the availability of cash and the assessment of an investment’s potential value to the business. With acquisitions, it’s these same factors and more!
In the case of potential acquisitions, input on availability of cash and assessment of returns may be quite complex as suggested in the table below. As a company explores growth through acquisitions, their CFO’s guidance will be critical from the start of the effort through the completion of a transaction.
Three questions a CFO must
prepare for related to acquisition strategy
CFOs will, of course, face a wide range of both highly detailed and broadly strategic questions in the course of considering acquisition opportunities. While each company’s strategies and acquisition opportunities will require very specific analyses and preparations, anticipating the three questions below may help a CFO and their team to meet concerns they’ll likely face. Preparation for each of these questions is best started well ahead of considering any specific transaction and ought to be part of the mindset that a CFO brings to their company’s executive team at the time an acquisition strategy is first developed.
Question #1: “What’s the value of this company?”
This question is often accompanied by discussions about EBITDA multiples, comparable transactions, and quality-of-earnings. To be sure, these financial analyses are important input for evaluation of an acquisition and securing capital to support the deal. However, a CFO must go beyond how the “market” may view a particular company and consider the “value to ‘our’ company”. That value may be higher, lower, more certain or less certain than for the so-called market. It will take into consideration the potential impact on revenue growth, access to new customers, new markets, new products/technology, expense/cost synergies, capacity utilization, changes in business risks, and organizational/cultural fit.
Question #2: “Must we spend all that money on due diligence?”
In short, yes. Setting the stage for a successful acquisition will require preparatory investments of time and money. Out of pocket costs for confirmatory diligence may require spending on accountants, tax experts, and environmental engineers. More qualitative areas of diligence, such as related to customers, market segments, and organization, may also require costly spending. These upfront investments will generate high “returns” when the right opportunity is found and a CFO should help set expectations as to the funding required.
Question #3: “Does this deal still make sense?”
As a deal nears finalization, this “back-to-square-one” question will inevitably come up. In the midst of intense negotiations and a flurry of activities, it’s important to step back and view the deal against the objectives originally set. In this regard, the counsel of one investment banker is well-considered by CFOs with acquisition on the horizon: “Understand the risks and be ready to ‘walk away’ when the costs or risks exceed the benefits. Plan in more detail than usual and value the experience of your team and advisors. … Measure your progress against your pre-acquisition goals and objectives.” A well-prepared CFO will be ready to respond.
Three questions that CFOs should ask of their
colleagues vis-à-vis an acquisition
Question #1: Is our business capable and ready to integrate the acquisition and execute the go-forward plan?
For too many companies, planning for integration is deferred until relatively late in an acquisition process. Such delays in planning put most acquisition goals at risk. The CFO often plays a role within a company’s management well-suited to imposing appropriate importance on allocating resources to and emphasizing the importance of integration planning.
Question #2: How does this acquisition compare in a make-versus-buy analysis?
Assuming that the goals of a prospective acquisition are aligned with the company’s strategy and priorities, the CFO should initiate discussion of how the expected results from the acquisition (a “buy” approach) might be achieved through a different course of action (say, a “make” or “build” scenario). If a deal is not successfully negotiated or the acquisition doesn’t proceed otherwise, the “make” scenario may be only viable path ahead.
Question #3: Are we assuming that we have some magic touch that the current owners don’t’?
In the words of a CFO experienced with dozens of acquisitions, “A strategy based on how smart we are and how dumb the other guys are is doomed.” His advice… be sure to challenge such thinking!
CFOs and acquisition strategy – what additional preparations fall to the CFO?
“Chance favors the prepared mind.” Louis Pasteur
The decision to pursue acquisitions, whether through a deliberate campaign or on an opportunistic basis, is typically initiated by a CEO and the company’s board. Nevertheless, the CFO plays a critical role in enabling timely and thoughtful consideration of each opportunity. Among the key drivers of success for a CFO related to acquisition strategy are the following:
- Maintain relationships with current and prospective sources of debt and equity; when the company may not fund acquisitions from cash-on-hand, “warm” relationships with potential sources of equity and debt are essential to avoid having uncertainties from deal finance complicate a transaction.
- Review potential acquisition funding strategy with the board (or company ownership)
- Acquisitions will likely require the commitment of both internal and external resources, well-suited to the work and available to engage. Maintaining relationships with potential external advisors, consultants, and experts can help an acquisition strategy stay on track without delays or risks associated with engaging with outside support unfamiliar to the company.
“Lack of experience with the development of strategy initiatives in general… the acquisition strategy ends up being too general, not enough emphasis on action-ability. Acquisition strategies tend to be unrealistic… too much focus on the deal-making and not enough realism in the level of difficulty to achieve synergies, execution of the integration, etc.” Middle market executive.
About The Author
Joseph Feldman is President of Joseph Feldman Associates (www.josephfeldman.com), a Chicago-based corporate development consulting firm founded in 2003. The firm provides acquisition and other strategic transaction consulting for growing companies and their investors.
Contact Joseph at firstname.lastname@example.org.