• Strategy

When, Why, and How to Grow a Business Through Acquisition

September 24, 2024

Growth-stage companies are feeling the pinch right now.

With the economy growing more slowly than inflation and uncertainty lingering about whether we’re heading for a hard or soft landing, businesses have to be more creative to achieve growth while simultaneously sharpening their focus on profitability. Customers are tightening their budgets, making every expenditure more judicious. Plus, AI is disrupting software and services spending as corporate buyers suss out what to put their money toward when technology is changing so quickly. In such a landscape, the path to organic growth can feel like an uphill battle.

But this environment also presents a unique opportunity: It might be the right time to consider inorganic growth — namely, mergers and acquisitions (M&A).

Why consider M&A now?

Growth through acquisition isn’t just about cutting costs. While there may be some redundant expenses to eliminate, the primary objective is often to expand your top line. M&A can open the door to new market segments, complementary products or services, and opportunities for cross-selling and upselling. It can also help you expand your team’s talent and skill sets, enhance your value proposition, and even allow your customers to consolidate their vendors.

Market conditions are becoming more buyer friendly for a few reasons:

• Deal multiples are receding from their mid-2022 highs. When deal multiples are high, buyers pay a premium relative to the company’s revenue and earnings. Conversely, when deal multiples decline, as they have recently, buyers can acquire companies at more attractive valuations, securing more accretive deals.
• Well-run organizations have access to cash. This liquidity — via cash on hand or access to cash via debt financing — gives buyers the flexibility and speed needed to act on opportunities as they arise. This is a significant advantage in the M&A market, where timing is critical. By the same coin, access to capital is drying up for less developed organizations, making them ripe targets for acquisition.
• Slowing macroeconomic conditions are causing natural realignment. Many CEOs expect to actively pursue divestments this year. As growth-stage companies look for ways to increase market share and acquire new capabilities in the face of slowing organic growth, opportunities for M&A are increasing.

Tips for overcoming the challenges of M&A

Use these guidelines to take a proactive approach and stay on track:

• Pursue conversations with everyone — even competitors: These talks will help you understand the market and uncover potential acquisition opportunities. Remember, you don’t need to share confidential information during these discussions. And even if the interaction doesn’t lead to a deal, which will be the case most of the time, you’ll still expand your professional network and have a nascent relationship in place should circumstances change in the future.
• Look for cultural fit: A shared set of values, beliefs, and work styles fosters a strong foundation for long-term success. Such cultural compatibility enhances team cohesion, facilitates decision-making, and minimizes conflicts during and after the M&A process. In our experience with growth-stage companies, cultural fit is the most important determinant of success.
• Allocate dedicated resources for deal execution and integration: Assign a cross-functional team responsible for overseeing the acquisition and leverage outside assistance wherever the internal team lacks capacity or expertise. This team should work collaboratively to address challenges, manage risks, and create a comprehensive post-acquisition integration plan.

It’s important to remember that M&A is a fluid process. Be prepared for your priorities and expectations to change during the course of a transaction — the process will likely take two to six months (or more) from initial conversations to a closed deal. Many good acquisitions are the result of companies having multiple conversations with each other for years before a deal is agreed upon. Stay focused on your goals to give your organization the best chance of success.

The risks of an unsuccessful acquisition

The risks of a poorly planned or executed M&A can be significant. The process is a major distraction from your core business, so a failed deal or mismanaged merger means you’ve lost months of productivity with little to show for it. Culturally, a botched M&A can lead to negative impacts that ripple through both organizations, leaving employees disengaged and more resistant to change. Post-deal integration hiccups can lead to additional operational disruptions, turning what should be a strategic advantage into a liability.

When to outsource strategic M&A needs

Larger companies often have dedicated business development teams to handle M&A, and those with private equity backing may have additional resources at their disposal. But for growth-stage companies, it’s not uncommon to find that internal resources are already stretched thin, even before considering M&A.

In such cases, outsourcing certain aspects of the M&A process can be a smart move. Consider bringing in external advisors for target identification, project management, and due diligence while your company concentrates on finding a cultural fit. This allows you to leverage external expertise while keeping your internal team focused on what they do best.    

Fintelos is here to help

Navigating the M&A landscape can be daunting, especially if it’s unfamiliar territory. At Fintelos, we help growing software and services companies explore M&A opportunities, assess their readiness, and develop tailored strategies to execute successful acquisitions.

Whether you’re just beginning to explore the possibilities or are ready to take the plunge, we’re here to guide you every step of the way. Learn more about how we can support your growth journey at fintelos.com, or reach out to us directly at info@fintelos.com.