By Kelly Kolke, Grant Thornton
AcquisitionsBusiness & Professional Mergers and Acquisitions
If you are considering acquiring another firm as a way of expanding your business, here's advice on different steps you need to consider.
In any professional services firm there are a number of ways to grow your business. You can expand the ways you get involved in projects, add new lines of business, or grow areas of specialty. You can look at geographic growth and entering new markets. But for many professional services firms, growth is often tied to acquisition, which can be an easier and faster route than organic growth.
Our firm released a global survey last year that showed mergers and acquisitions (M&A) activity is on the rise. In Canada, 40% of businesses we surveyed said they plan to grow through M&A in the next three years (up two points), and almost half said they had seriously considered at least one acquisition in the past year. I suspect that the numbers would be even higher for professional services firms.
If you are thinking about an acquisition, what you first need is a solid, long-term growth strategy so you can see how an acquisition fits into the big picture. It’s kind of like driving a car — you should know your destination before you put the pedal to the metal. Ask yourself what growth really means to you, and establish measurable goals.
As you begin to kick the tires of potential targets, many questions will come up. Are you paying the right price? What about their books — do the numbers look right? However, an acquisition is more than just the numbers. You need to look at all aspects of the target firm. Does it fit your strategy? Do they have the types of clients that you want to deal with? Are they in the market you want to be in? What kinds of systems do they use, and how easy will it be to integrate? How solid are their operational processes, and what kind of controls do they have in place? What about their culture and people? Even when a merger makes perfect sense on paper, it can fall apart if there’s a difference in what the two companies want to achieve and how they want to do it. Many underestimate how vast the cultural and people differences might be.
Also, start thinking about integration issues from the beginning, and build these into your negotiations. For example, will there be a name change, and exactly how and when will that happen? What about your communications strategy? How and when will you tell your customers? These are just some of the important post-merger questions you should negotiate up front.
Once both firms have determined there’s a good business case, it’s time to begin the due diligence process. While the firm you are acquiring has a duty to be forthcoming, you still need to do some digging to uncover any hidden surprises. I’ve found that some owners don’t have a solid understanding of due diligence methodology, and many turn to outside consultants to help them comb through all the data.
Sound a bit time consuming? Yes. In fact, that’s one of the other potential pitfalls of acquisitions — many underestimate the time involved. It’s not something that you should try to do “off the side of your desk.” Think about assigning someone to oversee the project so you can continue to run the business. This person will be critical in the negotiation phase, but their role is just as important after the deal is signed and the champagne cork is popped. In some ways, that’s when the real work — successful operational integration — happens. “Status quo” is a bad integration strategy.
Remember that your people will be going through a lot of change, which is stressful and scary. Stay in tune with how people are feeling, and ensure you are communicating with them throughout the whole process. Make sure they are getting the right level of training and support as the new systems and processes roll out, and ensure that they see the benefits in their personal role. As well, identify key people in advance (particularly in head office functions like IT and accounting), and make sure that they have appropriate incentives to stay around.
The bottom line is that engineering firms without a growth strategy simply won’t have consistent growth, so make sure you have one and consider whether an acquisition might be part of it.
Kelly Kolke, C.A. is a partner with Grant Thornton LLP. He is based in Nova Scotia. E-mail Kelly.email@example.com