Buy it or build it?
It’s a question business owners often face as they consider the best way to achieve their company’s growth objectives. Jill Arena recently represented a plastics company that was interested in growing and wanted to buy an injection molding and extruding company in Texas.
“The company wanted to do the extruding in Texas to move the product to Mexico,” says Arena, who serves clients as an M&A intermediary through Arena Enterprises. “Why would they ship the finished product from Ohio to Mexico? Let’s buy an extruder in Texas and we’ll just ship it from Texas.”
It looked at 20 companies, with mixed results.
“We couldn’t find what we were looking for, as they didn’t have the equipment we really needed,” Arena says. “If you put in the work and you can’t uncover the type of business you want to acquire, the best option is typically to go ahead and build it.”
Dealmakers spoke with Arena — who has spent more than 20 years providing buy-side advice to small and middle-market companies — about acquisition strategy and the importance that a strong narrative can play in guiding you to the best outcome.
Get a clear picture
A good acquisition, if that’s ultimately what you’re able to do, begins with a solid foundation.
“There’s got to be enough of a business case to make an acquisition before you start looking,” Arena says. “A thoughtful acquisition business plan is critical.”
Get your criteria down on paper and list all the reasons why an acquisition would be good for your business.
“What are we looking for?” Arena says. “Who are we looking at buying? Where are we looking at buying? Why does this make sense for our company now?”
Arena is an advocate for a good, concise story that lays out your case for making a deal. It’s crucial in her role as an intermediary who will then make her clients’ case to potential sellers.
“When my strategic buyers sit down and they tell me their story, it has to make sense to the sellers that I call on their behalf,” Arena says. “I call sellers on behalf of a specific buyer and there has to be a reason for the acquisition. It can’t just be world domination. It could be, ‘I want every staffing company in Cuyahoga County because I want the girth. I want to be huge.’ Whatever the reason, the seller is going to want to know, ‘Why do you have interest in me?’”
Arena spends a lot of time counseling clients in the staffing industry, but she also works with a wider range of strategic buyers and private equity firms. No matter the industry, a buyer needs to have a good idea of what it wants.
“If you don't have a clear picture of what’s important to you, you’ll waste time looking at companies that don’t match your buying criteria and time will be wasted,” Arena says.
Take the path less traveled
If you’re wavering between making an acquisition and building organically, there are some important metrics to consider.
“What would it take to enter that market and what would the cost be?” Arena says. “What would it cost if you built in that market? Would that be easier and less risky because you wouldn’t be taking over a poorly performing business that didn’t have any of the equipment you needed anyway?”
Acquisitive companies struggling to find a match may want to evaluate their process for identifying potential sellers.
“Buyers should make unsolicited offers or hire a firm to do so,” Arena says. “Don’t get caught up in buying companies from investment banks where a lot of people are competing for the same businesses. Look elsewhere. You wouldn’t believe how many lawyers are putting companies up for sale. Two of my deals last year were done by lawyers. There’s a lot of money and a lot of buyers chasing good deals, so consider other deal sources.”
If you decide that your goals can be achieved through organic growth, stepping away from M&A can be a wise move. If you’re committed to making a deal, it’s important to find a seller with whom you have a good rapport, so it may take some time to find the right partner.
“Stay the course and don’t get frustrated,” Arena says. “You might have to kick a lot of tires. Just trust your legal team, your search firm, your accounting firm and your evaluation team. The more clearly you can communicate your vision, the more successful your search will be.”
