Even in normal times, the business landscape is becoming more and more challenging. Executives have to make strategic decisions rapidly amid a growing array of threats: heightened competition, customer pressure, supplier risk, the possibility that disruptive technology could replace your product or service, flagging employee motivation, potentially outdated processes and systems, and the challenges inherent to your company’s stage of development – just to name a few. Those are all factors that reduce short-term visibility and complicate the long-term outlook
If you add in the prospect of losing everything during a crisis, or the opportunity cost of not seizing an opportunity arising from an economic shock, then it becomes even harder to know what the right path is to take today.
At INFLEX’ON, our aim is to give executives the tools they need to have a clear vision of the future, to better understand the short- and long-term challenges they will face, to map out a strategy for overcoming those challenges, and to keep creating value over the long haul.
In this article we will look at a question that CEOs have been asking us over the past few months: is now the right time to buy, sell, or sit tight? This question – which boils down to what business owners should do with their assets during a crisis – can be looked at from different angles:
- Should you take advantage of the crisis to buy a business at a potentially low price?
- Should you sell your business before it is too late?
- Should you focus on organic growth and shield your business as much as possible, waiting for the storm to pass?
Here we will go through the various factors you should consider to develop a road map that will not only make sure your business stays on track, but also help you take advantage of the turbulence arising from just about any kind of crisis or shock. The first step will be to go back to the fundamental question of why you want to carry out a merger or acquisition in the first place and what the relevant drivers are for your company. Only then will we be able to answer the question of whether – and how – the turbulence can reveal a strategic opportunity.
Going back to the basics to map out the road ahead
The decision of whether to buy (and what to buy) or sell depends, among other things, on what stage of development your company is in. Below are four simple yet crucial questions to ask, summarized in Exhibit 1. This exercise will help you flesh out an effective M&A strategy.
1. Where did your company come from, and where is it going?
The idea here is to identify which inflection point your company is headed towards or already at. If you are not sure, our article titled “Value Creation for SMEs – The ins and the outs of the inflection points” describes a simple method you can use to find out. Once you have pinpointed exactly where your company is, you will be ready to answer the next questions.
2. Would a merger or acquisition enable your company to move past one (or more) inflection points?
After you have a good idea of what you would like the next steps to be in your development, you can evaluate if an acquisition is the right move to get you there – or would even let you leapfrog certain steps entirely.
Whether your strategy is to boost market share by acquiring a direct competitor, to diversify your business so you are better positioned for the future, or to vertically integrate by acquiring a customer or supplier (and thereby prevent customer or supplier risk), an acquisition could be an attractive option for taking your company to the next level, as we discuss in the following section.
The same holds true if you are thinking about selling your company. Being part of a larger organization could help you achieve your business goals faster or let you get to a stage that would not have been possible without the merger.
3. Would a merger or acquisition take your company to the next level much faster?
It is important to think about how much time an acquisition could save you – bearing in mind that the many costs inherent to an acquisition could also take up a lot of time. So the amount of time you could save should more than offset the additional time you would spend.
Once again, the same holds true for selling your business. Your company could be less agile after it is acquired. Therefore the transaction itself must put your company in another league altogether.
4. Would a merger or acquisition improve your company’s cash flow, enabling you to reach your next strategic goal?
Cash flow is one of the most important elements in business development. It is not only essential to your near-term survival, but – if managed efficiently today – will be a key factor for your success tomorrow.
Therefore you should first calculate what cash flow you need to take your business organically to its next stage of development, and compare this with the overall cash needed for the acquisition (the cash required for the buy-out plus the cash that will be generated or used after the acquisition takes place).
As you perform this assessment, do not forget to account for the synergies and integration costs that will affect your working capital requirement, or for the time value of money – and consequently the opportunity cost of your investment.
You now have the tools to evaluate the merits of an acquisition and see the bigger picture more clearly. While Questions 1 and 2 relate to the current situation within your company, Question 3 considers how you can best anchor your market position, and Question 4 addresses the issue of optimizing your company’s critical resource – cash – and your strategy for using it.
You can now develop a plan that is at once viable and effective in getting your business to the next strategic level, while keeping it on track in the short term and positioning it well for the long term.
Note: This article is written from the point of view of a company’s management. However, there is another point of view that is just as important: that of the company owners. Whether those owners are part of the management team or non-executive shareholders, their goals should be taken into account. And sometimes those goals may conflict with the interests of the company itself. There are specialized consultants you can work with to better understand your company’s situation and your shareholders’ perspective, and help you find a solution for reconciling, or even converging, the interests of your various stakeholders.
We would also like to point out that our intention here is to help you decide whether a merger or acquisition could be a good idea in general. However, each opportunity is different and should be considered on a case-by-case basis. For instance, you should evaluate whether your assumptions about the benefits in terms of time-savings and cash-flow hold true for that particular transaction, and weigh other aspects such as potential synergies and the compatibility of your corporate cultures.
Long-term drivers for a merger or acquisition
Let us now take a deeper look at Question 2: Would a merger or acquisition enable your company to move past one (or more) inflection points? There are several ways in which a merger or acquisition can take your company to the next level. It could enable you to achieve critical mass, diversify, innovate, vertically integrate so as to give you better control over your supply chain, or improve your cash flow.
