Growth Through Acquisition

Unless you are someone like Google or Amazon, achieving double digit organic growth might seem unlikely.  Perhaps acquiring smaller competitors or a “growth by acquisition” or a “buy & build” strategy might make sense for you and your business.  At Precision Capital, businesses that are looking to grow in this way is what gets us out of bed in the morning.  We absolutely love these types of transactions and have completed a number of them over the past several years.  With that in mind, here are a few of our top insights on how to secure valuable capital for these deals with the right lender:

1.       Framing

Don’t call it a roll-up if it’s not a roll-up.  Too often this term is thrown around and can send chills down the spines of bankers that have been burned in the past.  A roll-up contemplates an initial portfolio of business coming together on day 1, which naturally contains a higher degree of risk than say an established business that is looking to acquire a competitor or series of competitors.  Some Banks hear the word roll-up and that is the end of the conversation, so it’s important to be clear on what the transaction is.  Roll-ups, growth by acquisition and buy & build transactions are all possible, but it’s important to ensure the right lenders, with the right experience and appetite form part of the competitive tender.

2.       Value

How is value being created?  How does 1 + 1 = 3?  Be clear on what your acquisition criteria is and why it makes sense.  Acquisition for acquisition’s sake is meaningless and could result in a larger and horribly inefficient business.  What are the incremental, tangible gains as a result of better buying power, streamlining tech, securing talent, better head office support, better education & training, better product offering, better processes, better innovation, better service for the consumer?  Bigger doesn’t always equal better and so its important to be able to articulate what will change, why and how this delivers value to the consumer.  All things being equal, the business will deliver higher margins, generate higher levels of profit and achieve a higher value on sale / exit. 

3.       Exit

Typically with growth by acquisition strategies, Bank facilities may typically be interest only or largely interest only initially.  This is to preserve free cash for reinvestment in the business or to support further acquisitions side by side with debt and equity.  A Bank is happy to accept this position on the basis they are supporting a business that is satisfying point 3, growing in value, but will ultimately want to know when they can expect to get their capital back.  What is the timeline for exit and how do you expect to achieve it?  IPO, trade sale etc.  What is the depth of the market for buyers of your business?  This information provides greater clarity for the lender and assists in securing solutions that optimise free cash.  The alternative being no defined exit strategy, resulting in higher levels of amortisation earlier to reduce risk, which is not ideal.

4.       Sustainable competitive advantage

Why do consumers come to you over your competitors?  Are you competing on cost or value delivered?  What is it about your business that makes you different?  Can it be replicated?  Are the barriers to entry high?  This forms this basis of how value is created and protected, and ultimately results in a more successful sale / exit.  Securing capital is as much about the numbers as it is story telling.  A lender will always want to unpack and understand the why as numbers mean very little without context.  It is important for the lenders to buy into the fabric of your business as much as you do.  This way it becomes easy for them to advocate for the deal and why the Bank should back this client.

5.       Culture

At Precision Capital, we often say the numbers are what the numbers are, but what can really move the dial for or against you are the intangibles.  Without your people, the EBITDA of today could look very different tomorrow and so how do you measure culture?  How do you measure the heartbeat of your business?  What is your external / customer NPS?  What is your internal / staff NPS?  What does your staff turnover look like?  What is the average tenure of your staff / leadership team?  How do you recruit, attract and retain staff?  Do you have incentive programs for high performers?  Do you have a staff reward program?  How does head office engage with the operating businesses?  While this might all seem somewhat warm and fuzzy, it does talk to the sustainability of the cash flow of your business.  As businesses grow and acquire, there is a mixing of businesses, people, processes and culture that has the potential to cause disruptions.  Being across this aspect is particularly important, especially for those that might have a more aggressive growth strategy.

6.       Capital

We often get asked how much capital is required for these types of deals and our answer is often “it depends”.  Generally speaking, it’s 50% debt and 50% equity, but the level of debt can dial up or down depending on your experience in having successfully completed on these types of transactions in the past and how you will deliver on points 1-5 above.  Most transactions we see are non-recourse in nature, involving family offices, private equity firms or high net worth groups, with debt in the overall capital structure representing anywhere between 35% and 67%.

If you’re looking to take the next step in your business’ growth trajectory, talk to Precision Capital.