Value creation in any business is rooted in growth. All other things being equal, higher-growth businesses enjoy greater transaction multiples (and, consequently, value) than do companies with lower growth rates. Growth in a business comes from five different sources:
- Expanding the product set offered
- Reaching more customers through existing channels
- Expanding sales and distribution channels
- Vertical or horizontal integration
- Creating new strategic business lines
All of these growth sources can be built internally or bought through acquisition.
To buy or to build?
How do owners or managers decide to buy or build? Generally, teams make decisions based on the tradeoffs between the two, and strategic need will drive such decision making. The tradeoffs that enter into these decisions revolve around speed (a buy decision can execute faster than a build strategy), cost (generally higher and front-end loaded for an acquisition) and risk (a buy decision is usually “all or nothing” while a build decision provides an “out” if the strategy does not execute to satisfaction).
Due diligence and strategy for buying
A growth strategy centered on making an acquisition (or series of acquisitions) should be designed as any other strategy. What is it that you are trying to acquire? The list of attractive attributes of acquisition candidates typically include:
- Speed of market entry
- Supply chain security
- Product lines
- Intellectual property
- Management talent
- Capacity absorption
- Operating synergies
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