In Exit Strategies

By Scott Bushkie

With most acquisitions, the purchaser is looking to grow value by enhancing their top and bottom line. These acquisitions work best when they accomplish one of two goals: expand the moat or reshape the hourglass.

Expanding the moat means leveraging your core advantage. The more you can strengthen that advantage, the wider the moat around your company, protecting you from competitive forces.

As for the hourglass, its narrowest point is your company’s weakness or limiting factor. If you can find a company that does that thing well, and integrate it into your business, you reshape the glass so business flows through with ease.

Most acquisitions, then, are either about leveraging an advantage or eliminating a constraint. Whether you’re buying business or trying to target possible buyers, here are some synergies to consider:

Product or Service Extension. Basically, this means selling new products or services to your existing customers. When buying a company, look for a business that has different products selling to the same type of customers as yours.

You’ll gain efficiencies in the sales process through cross-sales opportunities. And by expanding your service line, you become more of a one-stop-job, providing greater efficiency for your customers.

Market Extension. Sell your existing products to new customers. When buying, look for a company selling similar products in a region where you aren’t already active.

A few years ago we sold a food brokerage company to a similar firm that was trying to grow its Midwest presence. Our client had a firm foothold in Nebraska and Iowa, two areas the buyer had not gained much traction. The buyer opted for an acquisition to capture immediate market share in those states.

Backward Vertical Integration. In this scenario, you purchase one of your suppliers. This might make sense if you’re have issues with quality control, timing, or pricing. Or perhaps products are limited, and it could be a significant advantage to own the manufacturing or supply end of the chain.

For example, we have a manufacturing client that’s been approached by one of their larger customers. The customer is pursuing an aggressive growth strategy and has decided it would make sense to control production from start to finish.

Forward Vertical Integration.  With forward integration, you might see a manufacturer, who currently sells through distributors, looking to control its own sales channels. By buying a company with a proven sales network, they can ensure their product gets maximum representation from a proven sales team.

These are just some of the more common M&A business ideas and strategies we’ve seen implemented, not a complete list. Of course another viable option is Horizontal Integration, which is buying out a direct competitor. As I mentioned last month it’s possible this is a good option for certain scenarios but it’s a risky proposition for the seller and one we tend to avoid when other synergistic opportunities bring good buyers to the table.

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