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Webinar: How To Navigate A Deal With Private Equity Funds And Be Successful

For many sellers, the notion of selling the business they built from the ground up to a private equity fund is unimaginable. Many have heard horror stories from their friends, perhaps read books about the pitfalls of private equity buyers, and may even have some personal experiences. While dealing with private equity funds can be problematic for sellers, they often also are the best, most logical buyer. They are well-funded, so there is little risk the deal will fall through because of the inability to fund. Also, today’s private equity funds generally will leave their portfolio companies to operate free of interference, only offering support, guidance, and growth capital. However, if unrepresented by a capable M&A advisor, sellers can run into many problems in the midst of a transaction with a private equity fund. 

What are these pitfalls? Here are a few:

  • There’s a pronounced gap between what is expected from the fund as it relates to data and what is readily accessible from the seller. How do you bridge that gap?
  • Be aware that Private Equity math is very complicated. Will they bring leverage to the transaction? Where will that debt sit? Will it appropriately dilute their equity? What is a Net Working Capital Peg? How is it calculated? How can buyers use it to erode deal value?
  • How do you know that the deal being offered is competitive with what is out there in the market? PE Funds buy companies for a living, so they are very shrewd negotiators.
  • Due diligence in PE deals is very rigorous. While diligence is a fact of life in all deals, how do you know that a buyer's request is reasonable? How do you know that the timing of each diligence item won’t interfere with your business?

Fear not. An experienced and capable advisor can help you navigate through each of these obstacles. In this webinar, we will discuss the pros and cons of partnering with a Private Equity fund and pay particular attention to how best to handle the complexity these deals inevitably introduce.

Click here to Sign Up For the Webinar

Hosts:

Dara Shareef
Managing Director
Benchmark International

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Break Beyond Limitations – Become a Generalist

Although prior knowledge of how to approach a particular problem helps us to some extent, it can largely hinder our decision making process. Instinctively, the human mind causes us to succumb to second guessing ourselves and making a decision out of fear, rather than from intuitive knowledge. Additionally, the human mind also has a predisposition towards cultivating an inside-view during decision making. An inside view considers a problem based upon the surface level information of the specific task at hand, and makes predictions based upon the narrow set data points relative to the problem. Comparatively, an outside-view draws upon similar or even distant analogies to the problem at hand, by purposely setting aside information relative to the problem, in a conscious effort to minimize biases. 

We allow fear to control our actions and decision making. Sometimes, we may not even know it because we have done such a good job at convincing ourselves otherwise. We think of the future and obsess over adverse outcomes that can happen as a direct result of our actions. We are cautious and methodical, intentionally as to not make the “wrong decision.” This is how we involuntarily hedge our own personal risk. Often, this fear serves a constructive purpose, enabling us to safeguard our assets. But sometimes, this developed habit can act as a mental barrier to sound decision making when fear inhibits our ability to approach problems differently. Research suggests that approaching a problem with the same mindset developed from previous problems that are similar, may actuallyinhibit our ability to make the best decision or the correct valuation. Sounds counterintuitive doesn’t it? That’s because our brains are hardwired to draw upon our learned experiences when problems and solutions repeat. To approach a problem differently poses a risk, so naturally we develop a habit to approach the same problem in the same way despite how greatly the variables of each situation change. By critically evaluating past events, and applying previously learned knowledge gained from similar experiences, we are limiting our problem-solving abilities.

 

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The trouble in using no more than one analogy, particularly if it is a similar situation to the problem at hand, is that it does not help battle the inside view since we make judgement on the narrowed details that are the most apparent to us. The outside view is deeply counterintuitive because it causes the decision maker to ignore unique surface features of the current project, of which they are the expert.

In 2012, University of Sydney business strategy professor Dan Lovallo conducted an inside-view research study, to test the idea that drawing upon a diverse range of analogies would naturally lead to an outside view perspective and improve decisions. They recruited investors from large private equity firms who regularly consider potential projects in a variety of domains. The researchers believed that the investors’ expansive experience might have naturally lent itself to the outside view. The private equity investors were instructed to assess a real project they were currently working on and write down a batch of other investment projects they knew of with broad conceptual similarity. The results showed that the investors estimated a 50% higher return on their own project than the outside projects they had identified as conceptually similar. The investors initially judged their own projects, where they knew all the details, completely differently from similar projects to which they were outsiders. This is a widespread phenomenon – the more internal details you learn about any particular scenario, the more likely you are to say that the scenario you are investigating will occur. Therefore, the more internal details an individual can be made to consider, the more extreme their judgment becomes. The results of the study suggest that broad conceptual similarities should be considered when making a decision. In Range, author David Epstein argues that referencing distant analogies relative to the problem at hand, enables the highest rate of successful decision making. The outside view probes for deep structural similarities to the current problem relative to different problems. One way to achieve sound decision making is to develop self-awareness of the natural inclination to make self-proclaiming assumptions, and the limitations of becoming buried in details that may inhibit optimum decision making.

Additionally, possessing a diverse range of experiences enables the decision maker to be better prepared to approach any given problem with a broader mindset. With the work world changing faster than it did in the past, it is essential to broaden your specialty in order to optimize your decision making ability and expand your knowledge across a variety of domains. The people who make the biggest impact have a diverse background of prior experiences within their intellectual toolbox to draw upon when determining the best solution for a problem at hand. In 2016, LinkedIn conducted a study to analyze the career paths of 459,000 members to determine who would become an executive. One of the best predictors is the number of different job functions an individual had worked within a given industry. The study concluded that each additional job function provides a boost that, on average, is equal to three years of work experience. Therefore, to optimize your decision-making ability and create competitive advantage in the ever-changing workforce, take on new challenges and roles to strengthen your weakest abilities and become as well-rounded as possible. For us to be the best for our clients, we must approach each problem with a broad and open mind, while being cognizant of the transferability of our past experiences. Each experience has added value to who we are and has shaped our unique insight. The reward of learning a new skill develops new habits, strengthens the mind to overcome the fear of doing something new, and enables us to become the best version of ourselves for our clients.

 

Author
Jordan Stenholm 
Transaction Support Associate
Benchmark International

T: +1 813 898 2350
E: stenholm@benchmarkcorporate.com

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How A Sovereign Credit Downgrade Might Impact M&A Activity

While still managing to avoid a downgrade in April, South Africa has found itself at a crossroads of uncertainty since Moody’s Investors Service’s bleak budget reaction that sparked junk status fears for the country.

The speculation about the credit downgrade has been amplified by the fact that South Africa is in the middle of an election year – a factor that has also been blamed for a decrease in foreign investors’ confidence in the South African market.

An analysis of mergers and acquisitions (M&A) activity pre-and-post downgrades in Brazil and Greece suggest that although foreign investment will not end, investors do adapt their investment portfolios to align to the parameters of their investment mandates. 

Government bonds and treasury securities become largely un-investable instruments post a sovereign downgrade. However, statistics suggest that while capital outflows are a reality, some funds do remain behind in these countries, and new funds do flow in. These investments will naturally seek viable and alternative high-return investment opportunities – options often presented by M&A. One theory that emerges from this analysis is that mature economies have more stable but lower growth rates. While developed economies also represent a seemingly lower risk, they do not offer sufficiently high returns.

In order to achieve the required overall return on investment in a risk-on environment following a credit downgrade, fund managers will inevitably still require some form of investment in emerging markets.

 

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In order to understand the impact a credit downgrade has on M&A activity in a country, we compared M&A activity as reported by Zephyr, a Bureau van Dyk company that offers a database of deal information.  

We compared M&A activity before and after a credit downgrade in Brazil, which has a similar economy to South Africa due to slow growth and political instability in both countries, as well as in Greece. The raw data suggests that a catastrophic capital flight is unlikely because the sums invested may be lower and the investment profiles between the countries are different. But opportunity abounds and returns remain strong as there exists a direct correlation between risk and reward.

According to Trading Economics, Moody’s was the first to downgrade Brazil in September of 2014 for political and economic reasons. Fitch Ratings followed suit with a downgrade in April 2015. In July 2015, S&P downgraded the country too.

The Bureau van Dyk / Zephyr data looked only at transactions where the targets were Brazilian companies and considered deals that were both completed and announced each year. The transactions analysed include mergers, acquisitions, institutional buy-outs as well as venture capital and private equity.

It is evident from the data that the volume of transactions was relatively flat after the first downgrade by Moody’s in 2014. The volume of transactions decreased by approximately one-third after the remaining agencies downgraded the country in 2015.

While the total value of transactions reported also decreased, it is evident that the average transaction value in 2017 was similar to 2015.  For example, the average value per transaction in 2015 was R973 million and R929 million in 2017. On a cursory view, transaction values held up well after the Moody’s downgrade.

Analysing the data for Greece, which was downgraded in 2010, the following graph illustrates the effect on both volume and values reported by Bureau van Dyk over a similar period to Brazil.

The data illustrates a clear downward trend in M&A deal values over the period of the financial crisis in 2008, 2009 and well into 2010. While there was an initial slump in volumes and a slight decrease in value immediately after the downgrade in 2010, it is only 2017 that has subsequently underperformed the deal values as they were similar to levels seen in 2010. Again, the average deal size in the period following a downgrade is shown to have increased.

In conclusion

The data analysed makes no currency or inflation-related adjustments. And the data, being Euro-denominated, indicates that the M&A sector remained resilient even after credit downgrade events.

Although Moody’s did not downgrade South Africa to junk, the data from Greece and Brazil does indicate that deal flow will not evaporate should this happen. Volumes may initially drop but average deal values can be expected to increase.

While we continue to work to avoid it and acknowledge the punitive impact thereof, the statistical reality is that a downgrade is not likely to be as detrimental for the M&A sector as otherwise perceived.

 

Author
Andre Bresler
Managing Partner
Benchmark International

T: +27 (0) 21 300 2055
E: bresler@benchmarkintl.com

 

 

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M&A In The Global Mining Sector

The Role of Mining in the World

The global mining sector employs millions of people worldwide and its role in the global economy continues to significantly evolve. Standard functions in the mining industry include production of metals, and metals investing and trading. Additionally, there is a strong correlation between the global mining industry and other industries. For example, elements such as copper, nickel, and aluminum are core components used in the construction, aviation, automobile and other industries. In areas where mining is more concentrated, the industry plays a more important role in local economies.

According to the International Council on Mining and Metals, at least 70 countries are extremely dependent on the mining industry, and most low-income countries rely on it to survive. The same study shows that in many low-middle income countries, mining accounts for as much as 60-90% of total foreign direct investment.

Increased populations and urbanization drive the demand for growth in mining activities, as there is more demand for cars, buildings, and consumer products.

 

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M&A Challenges and Considerations

Mergers and acquisitions can be intense in the global mining industry. They are heavily influenced by timing, fluctuating commodity prices, supply uncertainties, and come with many variables depending on transaction size, volatile markets, and the geo-location of the mine. There are certain considerations that are unique to the industry:

  • Mining projects can have limited lifecycles depending on the availability of deposits.
  • Mines cannot be relocated to areas that may be more beneficial economically or politically.
  • Because there are great technological and geological constraints, mining companies are not able to adjust production to increase revenue.
  • Funding is less readily available, access to bank financing is limited, and investors tend to be more cautious and selective.
  • Countries may have greater government regulations, and indigenous mining agreements designed to mitigate negative effects and to share the benefits from commercial mining activity.
  • In some parts of the world, there are human rights concerns, increased policing for corruption, and environmental impacts.
  • Once the ore is extracted, mine closure procedures can take several years, in turn, expending money and labor for activities that are not yielding any profits during that time frame.

Gold Mining Sector 

The gold mining industry is known for placing a high premium on growth. As of 2019, analysts reported that the leaders of gold mining companies say that they find mergers and acquisitions to be an easier path to growth than exploring for new untapped deposits underground. Modern M&A deals in the business of gold mining now focus more on capital efficiency and operational excellence, with heavy emphasis on evaluation of the management team.

Copper Mining Sector 

Copper is an essential metal needed by industrial economies. Globally, the copper mining industry is one of the leading metal mining markets. The continued innovations in battery technology continue to attract investment into metals such as copper, which plays a critical component in the function of batteries.

Coal Mining Sector

Coal has been widely used to provide power since the Industrial Revolution in the 1800s. In the 21stcentury, coal mining faces new challenges alongside the pursuit and popularity of renewable energy sources. At the same time, innovation in the coal mining industry remains alive. New, state-of-the-art technologies are being developed. Sophisticated robotic mining machinery and computerized systems are being used to streamline mining and boost production to unprecedented levels. And industry leaders are looking into new uses for coal beyond its long-standing role in the energy sector. An example is the development of carbon fiber, currently used in the aerospace field, and potentially used in prosthetics, electrodes, 3D printers, and more.

 

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Shared Buyer and Seller Risk

In the mining sector, both buyers and sellers alike face risks of deal failure, but are more likely to see success if a strategic plan is followed. Two of the most important factors are pricing efficiency and post-sale integration. Both buyers and sellers tend to be more cautious in this industry.

  • Sellers should expect buyers to be on the lookout for the risk overpaying for your company, not being able to integrate the company as efficiently as possible, and dealing with issues such as uninsured legacy liabilities. Buyers may become interested in underperforming assets because they have more experience and access to financing that the existing owner, as well as better government relationships, a different risk profile, and the option of consolidation with existing mines or facilities.
  • Sellers risk facing purchase price disputes and post-deal issues with warranty and indemnity claims. Plus, fluctuating markets, especially in mineral-rich regions such as Africa, can make valuation difficult.

If proper precautions are taken to understand and avoid these issues, overpayment or post-close surprises can be averted. Other benefits that come with proper preparation include improved sale and purchase agreements, smoother integration, and more efficient corporate governance. Enlisting experienced M&A advisors as early on in the process as possible can aid in significant mitigation of transactional risks.

Contact Us

Please feel free to call us at Benchmark International to set up a conversation with one of our M&A specialists if you are thinking about selling a business. We look forward to discussing how we can help you with growth strategies, exit planning, or any type of transaction advice you may need.  

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The Changing Landscape of Indemnification in U.S. Purchase Agreements

It has been very interesting to follow the changes in market norms for indemnification over the last two decades. As due diligence has escalated dramatically, especially in the U.S. lower-mid markets, over that time, indemnification terms have moved in equal measure in the opposite direction. It seems that acquirers believe that an ounce of prevention is worth a pound of cure. While this has significantly increased the time between signing a letter of intent and closing, it has also made the negotiation of the purchase agreements a bit simpler. First-time sellers—always attentive to post-closing liabilities—seem to be much more comfortable with the current market terms for indemnification than they did with those in practice at the turn of the millennium.

While Benchmark International does not provide legal advice to its clients (or to acquirers), we do rely on our viewing of hundreds of purchase agreements per year to offer our seller clients a perspective on what we see as the norms for their market. While this is a moving target, our insights have remained fairly constant for the last three or four years as follows:

  • We see indemnification for any item other than a fundamental representation being capped at between 10 and 20% of the non-contingent portion of the purchase price.
  • Acquirers are still alternating between both baskets and true deductibles. These are typically agreed at between one and two percent of the non-contingent portion of the purchase price with baskets being at the higher end and deductibles being at the lower end. These de minimis carve-outs are applied to fundamental representations in about half of all deals.
  • The obligations for everything but fundamental representations survive for between 12 and 24 months, with 18 months coming on strong as the mode.

 

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  • Fundamental representations are almost always capped at the entire purchase price and survive for very long periods such as seven years, until the expiration of the applicable statute of limitations, or indefinitely. This survival period is one deal point for which we would say there is no market norm at the moment.
  • The representations classified as fundamental have not changed much over the years: organization, capitalization, authority, no conflict, ownership of assets, brokers, environmental, tax, and ERISA.
  • Fraud continues to be treated like the fundamental representations.
  • We still see a few acquirers attempting to leave out the provision encapsulating the indemnification as the exclusive remedy. And we still see sellers’ counsel never allowing that to be absent in the final draft. Leaving it out of a first draft has become so rare that it is almost seen as painting outside the lines, poor sportsmanship, or the like by our clients’ counsel.
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The Ultimate Checklist For Buying A Business

Acquiring an existing business can offer great advantages over starting a new business from scratch, especially if the target business is thriving and holds more opportunities for growth. When considering the purchase of a company, you should take certain steps so that you can be confident that you are minimizing your risk and making a smart move. Use this comprehensive checklist to help you ask the right questions and guide you through the process. 

 

☐ Is the Target Company Financially Healthy? 

This is a question you must ask yourself before considering anything else about the business. You will want to carefully comb through the business's financial statements for the past five years (at least) to identify if anything appears out of the ordinary and to assess how the numbers compare with standard performance in that sector. Also, request to see the tax returns for the same years. This will help you determine whether the owner has put personal expenses through the company books and give you a more complete picture of the company's actual value. You also will want to know if you will be taking on any existing debt, and exactly how much.

 

☐ Will You Be Able to Generate Cash Flow?

It is crucial that you know whether you will be able to generate cash flow immediately upon purchasing the business. If not, are you in a position to carry the business until that time comes? No matter how attractive the company may seem, you must ensure that you are not getting in over your head. Take a thorough look at sales records to assess past and future performance. You must also find out if any existing clients or customers are planning to part ways and what you can do to retain their business. 

 

☐ Does the Company Have a Good Reputation? 

Doing a quick Google search can reveal quite a bit about a business. You will want to see how the company is perceived in the world. Does it have a lot of negative reviews or bad press? Are there any customer complaints, and do you know how they were handled? Get a comprehensive look at the business's reputation because you are going to need to see if you have work to do in order to turn it around. This could include a complete rebranding and marketing effort, which costs money. 

 

☐ Have You Done Your Homework on the Staff?

When you acquire an existing business, you are also acquiring its management team and employees. You should know the skill levels and proficiencies of any staff you will be inheriting, and whether you are going to be faced with the task of replacing key staff members. Do all team members plan to stay with the company? Have they been made any promises by previous ownership that you will now be expected to fulfill? Is anyone retiring or planning to go on extended leave? Is anyone disgruntled about the sale? When you know the answers to these questions, you'll be best prepared to address any issues. 

 

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☐ What is the State of the Inventory?

If inventory is applicable to the business in question, everything should be itemized and given a carefully determined value. Will any inventory lose value with time, or only have a value at certain times of the year? Will it be adequately stocked for when you take over the company? When you are investing in a company, you're going to want to have everything you need on hand to generate revenue from its operation. 

 

☐ What is the State of the Physical Property?

First things first: you need to know if the business owns the property on which it resides or if there is a lease agreement in place. Then seek out answers to the following questions. What are the details of the lease and the reputation of the landlord? How much is the rent, and is it due to increase? Is the property in good condition, or is it in need of repair? If the business owns the property, what are the real estate taxes? Is the property able to accommodate any planned growth? Is it legally zoned? Is the location appropriate? Are you going to need to make changes, or find a new location altogether? This is an area where you cannot be too thorough. 

 

☐ Do You Have All the Legal Documents and Contracts?

This is another critical step in purchasing a business. You are going to need to have every last piece of paperwork that pertains to that business. This includes business licenses, copyright agreementspatentstrademarks, import and export permits, mining rights, real estate documents, etc. Basically, if something relates to the business in any way, you should have documentation of it. If the current owner has not kept good records, there is your first sign that you might want to think twice about moving forward with the acquisition. 

 

☐ What is the Condition of the Business's Equipment?

You should assess the condition of all office equipment, furniture, machinery, and vehicles used for the business. What is owned and what is leased? What are the items' lease or purchase details, and are there maintenance agreements in place? You should assess the condition of all equipment to determine if anything will need to be replaced because this will be a factor in the purchase price of the business.

 

☐ Are You Familiar With the Business's Suppliers?

This is important because suppliers can have a significant impact on how reliable your business is able to run. You want to ensure that they are established and committed to providing superior quality and service. Find out if they fill orders on time and meet their obligations. Look into any contracts that are in place, so you understand the relationship. You also will want to ask if there are any expected price increases or factors that may impact the existing arrangement.

 

☐ Contact Benchmark International 

If you are looking to buy a business, we represent highly motivated sellers in the lower-middle and middle market that may be the perfect fit for you. Contact one of our experts to discuss how we can help with target company searches. 

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Global Printing Industry Outlook

The global print market is shrinking in volume but growing in value. Output measured in billions of A4 prints was 49,973 back in 2014 but is forecast to decline very slightly to 49,654 by 2024. In value terms, print output is expected to grow from a total of $767.4 billion in 2014 to $862.7 billion in 2024 – a CAGR of 1.18%.

The role and dynamics of the print industry are changing, with the main factor being the impact of the internet and mobile connectivity on the way both businesses and individuals communicate and access information. This affects every segment of the traditional printing business, changing expectations of what is acceptable to speed, relevance, and degree of interactivity of data, irrespective of the medium used.

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Benchmark International's Three Key Philosophies for Getting Deals Done

As we work exclusively in the mid and lower-mid markets, we see many deals succeed, and some wither. In an effort to have more of the former and less of the latter, we would like to share our core philosophies with the belief that helping you understand them will make working with us a more rewarding experience.


1. Time kills all deals.

Prudent and deliberate action are certainly also key aspects of getting deals closed but, in our experience, neither buyers nor sellers are inclined to be under-prudent or lacking deliberateness. Rather, unexplained and avoidable delays tend to stack up between the first meeting and the closing. Each delay shaves off a small percentage from the probability of closing. There are enough legitimate delays in the M&A process. When we see one that can be avoided, we will step in and attempt to get the ball rolling once again.

 

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2. Transparency is the best antiseptic.

We’ve seen too many deals die because one side or the other has hidden something until it is too late. Long before you meet our clients, we will have already guided them on the value of releasing the troubling issues they might have at the earliest opportunity. Hopefully, you will already have seen some of this in our Confidential Information Memorandums. We lean forward into these issues because we believe that the sooner they are addressed, the more solutions there are, and the less likely anyone is to feel hoodwinked. We hope you’ll feel the same way with your own challenges (for example, lining up debt financing) as well as any you may see with our clients.


3. The emotional must be covered as well as the financial.

This may be somewhat unique to our clients as our process appeals to a certain owner type. As you probably know, we specialize in closely-held and owner-operated businesses. Nowhere is it more true that “every business is a family business.” Our clients have typically had 20- to 30-year relationships with their businesses and often equate the sale process to sending their son or daughter off to college. When we work with acquirers that understand the effects of this fact pattern, we see a much higher level of success. In fact, we have built our teams, our process, and our engagements around it. We will be more than happy to help you deal with this interesting aspect of our clients. Please just ask.

 

Author
Clinton Johnston
Managing Partner
Benchmark International

T: +1 813 898 2350
E: Johnston@benchmarkcorporate.com

 

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6 Books About Growing A Business That You Should Read

Growing a Business

By Paul Hawken

In this book, Paul Hawken explains how a successful business is an expression of the individual behind it, along with practical advice, common sense, and down-to-earth ideas. Even though it was written 30 years ago, it remains an excellent and very relevant read, backed by the fact that the author’s own companies are still successful after all these years.

 

Organizational Physics - The Science of Growing a Business 

By Lex Sisney

The author of this book spent more than a decade leading and coaching high-growth technology companies. In his work, he discovered that companies that thrive do so in accordance with six universal principles. The book covers a blend of important business and entrepreneurial topics in a manner that stands out from other business books.

 

Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine

By Mike Michalowicz

In this book, the author offers principles to simplify accounting and easily manage a business through analysis of bank account balances. The theory is that a small, profitable business can be more valuable than a large business surviving on its top line, and those that achieve early and sustained profitability have a better chance of maintaining long-term growth.

 

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Explosive Growth: A Few Things I Learned While Growing To 100 Million Users - And Losing $78 Million

By Cliff Lerner

This best seller provides step-by-step instructions, case studies and proven tactics on how to explode business growth. It reveals the detailed growth frameworks that propelled the author’s small online dating startup to grow to 100 million users while coupling humorous storytelling with concrete examples.

 

Traction: How Any Startup Can Achieve Explosive Customer Growth

By Gabriel Weinberg

Traction is based on interviews with more than 40 successful business founders about their real-life successes. It covers 19 channels that can be used to gain traction for a business, and how to select the best ones for your company. The book discusses topics such as targeted media coverage, effective email marketing strategy, and online search optimization.  

 

Growing Influence: A Story of How to Lead with Character, Expertise, and Impact

By Ron Price and Stacy Ennis

Growing Influence is packed with relatable human experiences and practical advice on developing the right leadership skills. It chronicles two main characters’ growth as they applied the principles in the book, mixing solid business advice with a novel that is fresh, timely and inspiring.

 

Ready to Grow Your Business?

Contact us for help with unique growth strategies for your company and how we can partner for your successful future.

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Why Buy-and-build Strategies Work

What Is Buy and Build?

When private equity acquires a well-positioned platform company to acquire additional smaller companies, using the developed expertise in a specialized area to grow and increase returns, it is considered a buy-and-build strategy. This strategy is common with private equity firms with shorter holding periods of about three to five years.

Why It Is An Effective Growth Strategy

If a buy-and-build strategy is executed correctly, a great deal of value can be created when smaller companies are combined under the control of a new company.

  • This type of acquisition saves time regarding the development of specialized skills or knowledge, allowing for growth and expansion to other markets more quickly and successfully with lower production costs.
  • Creating a larger, more attractive company offers a path to exploit the market’s inclination to assign larger companies higher valuations than smaller ones.
  • It provides a clear plan when deal multiples are at record levels and there is a need for less traditional strategies.
  • Buy-and-build deals generate an average internal rate of return of 31.6% from entry to exit, versus 23.1% for standalone deals.

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Getting It Right

The buy-and-build acquisition is not simple to execute. The process demands meticulous planning and due diligence for the strategy to work. The best deals usually employ multiple paths to create value.

  • Synergy between the acquirer and the acquired is important to the outcome of the deal. Companies should target existing firms that will be a good fit as a team both tactically and culturally. The human element should always be considered.
  • The management team must be an appropriate fit and have experience with these types of transitions.
  • There should be a vision in place for where the company will be five years down the road.
  • The platform company must be stable enough to endure the process regarding operations, cash flow, and infrastructure (IT integration in particular).
  • Sector dynamics should also be considered. Avoid sectors that are dominated by low-cost rivals or mature, stable players. Focus on sectors with many active smaller suppliers and service providers. Consolidation should result in cost savings and improved service.
  • While no two deals are the same, there are patterns for getting it right. Those experienced with buy-and-build strategies are more likely to lead to a successful deal.
  • It can be difficult to identify private equity firms because of the nature of the way they do business. It helps to have an experienced M&A firm with extensive connections and a proven track record of negotiating successfully with buy-and-build-focused private equity firms.

These reasons are among several as to why it is a sensible decision to enlist the help of an experienced M&A firm such as Benchmark International for your vision for growth. Count on us to help you get your buy-and-build strategy done right.

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