How to build an acquisition strategy

M&A can be the ideal solution for many business challenges. Whether you want to enter new markets, develop new products or accelerate customer growth, acquiring new businesses can get you there more quickly. At Livingbridge, we’ve helped our investees execute more than [100] deals over the years and the impact of M&A has often proved dramatic, creating significant new value.

However, M&A isn’t easy to get right. Your business needs to be thoroughly prepared to do it well: that means having a clear acquisition strategy and plan. That includes certainty around having the right financing arrangements in place, and making sure you have access to the expertise and support necessary to execute your plans.

Think carefully about whether your business is at the right point in its evolution to embark on a buy and build programme of M&A. Are you looking to do roll-up deals, buying up similar businesses to your own to increase market share? Or are you more interested in transformational M&A, perhaps bringing together two quite different or sizeable businesses to create new value? To decide what’s best for your business, you need to build a really clear acquisition strategy.

Creating an M&A plan for your business

Every M&A strategy should begin with a thesis that sets out why you want to make acquisitions. That means looking at today’s business model and thinking about how M&A could advance it or change it for the better. For example, do you understand your product value chain and customer value proposition? What is delivering the most value to your business? What are competitors doing more effectively than you? Where are the gaps in your product roadmap?

The answers to such questions should help you start to focus on your priorities. You may be looking to leverage your current business model, accelerating customer acquisition through deals with others in your marketplace. This will likely result in lower risk transactions, so can be a highly attractive acquisition strategy. You may be ready to take more risk though, with M&A opportunities that take you into new products or markets and evolve your business model.

Livingbridge investee company Sionic is a good example of a more transformational M&A strategy. In 2017, we invested in Catalyst Development, a specialist financial services consultancy that was largely UK-based. We supported the business to acquire investment management experts, Knadel, in 2018 and then to merge with Sionic Advisors, a US-based consultancy, in 2019. Following these two acquisitions the group, which has now rebranded as Sionic, has more than tripled in size and is in nine countries across the globe, with multiple new products.

The B2B internet service provider Metronet (UK) is another good example of what can be achieved. Livingbridge invested in the company in 2014 and supported it through two major deals: the £47.5m acquisition of M247 in 2016 and the acquisition of Venus Business Communications in 2017. The enlarged group, operating under the M247 brand, now employs over 250 people across six European sites, supporting 34,000 customers across 92 countries.

Value from the get-go

Crucially, however, these companies put the building blocks in place for that success with a clear acquisition strategy from the start. They identified the themes that would be crucial to their businesses and they developed a thesis on which they would base their M&A activity. This enabled the two companies to identify targets efficiently and effectively – and, finally, to hone in on those businesses best placed to help it achieve its growth ambitions.

This kind of structured approach will give you the best possible chance of success with your M&A strategy. Not only will it avoid you wasting time with unsuitable targets, but it also means you’re focused on value creation right from the beginning. That should always be your primary goal.

Livingbridge can help. Our team can support you as you think through your acquisition strategy, drawing on the experiences we’ve acquired from helping more than 30 of our portfolio companies make acquisitions in the UK and abroad.

Find acquisition targets

M&A can be a great way to accelerate your business’s growth. Acquisitions can help you to scale your customer base in your existing market, enter new markets and product areas, and acquire valuable new skills, knowledge and technologies. However, not every M&A deal proves successful and acquisitions that don’t work out can be hugely time-consuming and distracting. Without a clear plan in place for identifying the right acquisition targets, your efforts may not pay off.

They key to any search for potential merger and acquisition targets is to start with a clear rationale for why you want to make acquisitions. A carefully thought-through M&A strategy provides the foundations for finding acquisition targets, preventing an inefficient scattergun approach.

Building a pipeline of M&A targets

Once your business has a thesis for M&A, you can start turning theory into practice, focusing on potential targets for acquisitions that offer the best possible fit to your strategy.

Start by translating that strategy into selection criteria that will narrow down the potential choices. These will provide an acquisition target template against which you can map and rank potential targets.

To begin with, think in relatively high-level terms. What are you looking for in terms of products, customers, geography or finance and ownership, for example? Next, in each of these areas, identify the metrics that will help you judge whether a particular company is an interesting prospect – and how these prospects compare. Each of these metrics should easily map back to your overall strategy.

It’s possible that not all the data you want will be publicly available. You may only get access to certain information once you begin meeting target companies and signing non-disclosure agreements. Still, there should be enough data available to create and rank a relatively accurate pipeline of targets from the start.

Leveraging technology will help you to identify and prioritise targets much more efficiently and effectively. Think about how you will gather data from multiple sources and how you will store that data – probably in a customer relationship management (CRM) platform.

It’s important to cast the net wide to build an initial list of companies. Data sources might include existing contacts, industry body members, customer and partner networks, and even some basic internet searches. For each company on the list, you will need to populate your chosen metrics, again using a range of data sources to drill down into information on their products, customers, financials and other areas in which you’re interested.

This process should be comprehensive, but technology can help reduce the workload.

Managing the data to thin out the field

With so much data flowing in, managing the information well is a crucial part of the target identification process. A CRM system enables you to capture which companies you’re looking at and their metric data, key contact information, meetings you conduct, and, crucially, a scoring process for ranking potential targets.

Scoring may take different forms. You will want to look at how well a target company meets your criteria, but other attributes may be important too. How long would a deal take to complete and what kind of a relationship, if any, do you have with the company? Do you think they would be open to an acquisition?

Over a period of time, doing this work should give you a pipeline of potential targets segmented in different ways – by quality of company, by the likelihood of being able to do a deal and by when such a deal might be possible, for example. The more data you collect and the better the tools you use to manage that data, the more sophisticated your analysis will be.

Setting some targets around sourcing will help you build an acquisitions target template more effectively. How many companies will you aim to identify, approach, meet more formally and then take into a due diligence process? Volume is important: for one of our investees pursuing an acquisition strategy, we mapped several hundred companies, shortlisted 40 for an approach, met 24 and they finally acquired three.

Acquiring a competitor

It’s possible that you have an acquisition target in mind already; buying a competitor business is a popular strategy with companies looking to grow quickly in their existing markets. But while buying a business already well-known to you may feel more straightforward than starting from scratch to create a pipeline of potential targets, it’s important to be just as strategic and well-prepared as you review your options.

Above all, think carefully about what it is that interests you about potential competitor targets. What will they bring to your business? For example, does a competitor have a product that would complement your existing lines, particular technical expertise, or a service level you would like to emulate? Are you simply hoping to increase your share of the market by adding competitors’ clients to your customer base? Whatever the motivation, can you quantify what additional revenues the deal would generate – and how quickly these will accrue?

Buying a competitor without such a rationale – or simply for reasons of ego – is risky. It should bring something to your business that it currently lacks, whether that’s a particular asset or intellectual property, or a presence in the market currently out of year reach. How much overlap with your business does the competitor have? If it operates largely in adjacent markets, the growth opportunities will be more alluring than if it’s a very close fit to your existing proposition.

Look too at the potential to reduce costs when acquiring a competitor. Where are there replicated costs that it will be possible to strip out for the benefit of the bottom line? How easy will it be to realise those synergies?

Fishing in a big pool

Unless you’re focusing only on competitors, the process of finding acquisition targets will always start with identifying a large group of potentially interesting businesses – you don’t want to miss good candidates – and then working systematically to reduce the group down to a shortlist of the most attractive.

Livingbridge can help you with the process. We help you think about what it is in a target that can bring the most value – and help you build a list of businesses that meet the bill.

How Livingbridge can help with delivering an M&A strategy

Our experience working on more than 100 acquisitions with investee companies has taught us just how crucial it is to have the capabilities necessary to deliver an M&A strategy – and a detailed plan for execution. This is why we’ve invested in our resource and expertise to help deliver ambitious acquisition strategies. Our specialist and dedicated team can offer their unique perspective throughout your transaction process.  

In the beginning, our experts can provide a valuable sounding board as you consider how to turn your ambitions into reality, with a clearly thought-out M&A strategy. Once you’re ready to get moving, we have tried and tested methods you can utilise, from defining the acquisition criteria to integrating the new business.

In many cases, we’ve helped investee companies execute a series of deals to scale up their businesses rapidly. Many have been totally transformative, turning great businesses into the best in their sector. 

Broadstone is an example of what a well-executed and ambitious acquisition plan can achieve. Since we invested, we’ve helped it to acquire five companies in the pensions and employees benefit market, which is highly fragmented and therefore offers the best businesses real opportunity to scale up quickly. With our support, Broadstone’s acquisitions have seen it expand its regional network, take its international operations into Asia and double its scale in the actuarial consulting, investment consulting and pensions administration space.  

Another fantastic transformation was at Sykes Cottages, where we helped the company make no fewer than 12 acquisitions, helping it build its portfolio from 5,000 rental properties to 17,500 in less than five years. In 2019, we helped Sykes Cottages make its first international acquisition, with its investment in New Zealand’s Bachcare adding 2,000 properties to its offering and giving it fantastic new avenues for expansion.