17 June 2020

How to evaluate an acquisition: Part II

Times of change are times of opportunity. In recent years, the behemoths had an upper hand in executing acquisitions, often overleveraging themselves in doing so. While this was not an issue a few months ago, the global pandemic has virtually eliminated easymoney lending and made managing debt a lot trickier. Now, these larger players are more concerned with trimming down (and surviving) than adding another business to the books. This means less competition – and potentially better deals – for those in a position to purchase.

Still, rosy times or not, there are essentials for evaluating an acquisition. In our first installment on due diligence (in L&L’s April-May 2020 issue), we covered ownership structure and financials, which are the foundation for any transaction. If your target matches these preliminary criteria, you can then move to the second set of considerations: market positioning, sales organization, and customers. Examining these areas will help you better discern how a company can blend in with yours.

Market positioning. Most label and packaging companies cater to a specific segment – or are most profitable in one. It’s important to understand the primary niche. Does the entity focus on healthcare, consumer packaged goods, food and beverage? What types of products does it run in these areas? Certainly, it’s good to ensure the acquisition is well positioned in growth markets, but the product types also must be attractive – and remain so amid the changing climate. Segments such as food and beverage, personal care/hygiene, nutrition, cleaning supplies, and logistics are seeing a spike from Covid-19. And products with sustainability or anti-counterfeiting features are also growing. With the global digital color label and packaging market already slated to see a CAGR of 13 percent before the effects of the outbreak, according to a report by Technavio, these segments could be even more lucrative now.

The other aspect of market position is whether the acquisition is a good match for your operations. You’ll want to make sure the entities are complementary and that the aggregate equipment and capabilities will help you achieve your strategic vision. Combined companies may not realize both entities’ total revenues because of redundancies. Consider all avenues that can possibly open — and close — with the acquisition. The goal with M&A is 1+1=3. Make sure the deal will get you there.

Sales organization. An agile sales organization is an expected. But you’ll need to look at three key issues to ensure congruity with your business model. First, what is the go-to-market strategy? Are the target’s products sold via catalogs, a direct sales force, print partners, brokers, or a little bit of all of those? It’s extremely difficult to change a sales approach without losing customers. Make sure your organization can effectively assume existing activities, at least in the near term.

Second, take a look at territories. Will there be significant (and meaningful) overlap in combining your current business with the target? Namely, will you have multiple top performers in the same areas? Don’t fret over ‘assigned coverage’ in regions where you don’t truly have penetration. But make sure you understand exactly which customers may be affected and how any overlap can be handled to ensure you retain them.

Third, review the sales compensation plans, estimating operations, forecasting history, and close rates. Also find out if the sales representatives have non-competes, and whether they are enforceable in your various geographic areas. Determine the power players at the target acquisition and their formal and informal roles and whether there will be a conflict with your current structure. It’s important to be able to manage or adjust the team’s expectations.

Customers. Customers represent your cash flow and business stability, and should be scrutinized extremely carefully. Securing 5m USD in sales from a single, newer customer is far different from generating the same dollars across ten clients for years. Contracts are attractive, but they must be able to be transferred during ownership change. Though on paper you are buying a company, you are actually buying its transactions and customers.

There is always some attrition postacquisition – employees, salespeople, customers, and suppliers. You’ll also likely have to make cuts of your own. Make sure either won’t be significant or difficult.

Due diligence is an extremely important component of M&A. There are an enormous amount of details and scenarios to sift through. The more you can consider these factors ahead of time, the better off you’ll be. Many companies utilize the skills of tenured M&A advisories like The Open Approach to assist them in this. The process of acquiring, and integrating, a business can be extremely challenging. Ask every and any question. Look at issues from many angles. And dig deep. By analyzing all data, you can make a better-informed decision on the impacts of the change of ownership and whether this indeed will be a lucrative acquisition for you.