A Guide to Consolidation Strategy in Acquisitions

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The search fund mannequin is a technique of investing that permits entrepreneurs to take a singular path to enterprise possession. It is structured to assist searchers (entrepreneurs who interact in the search fund mannequin) purchase, function and scale an current enterprise as a substitute of constructing one from scratch.

By providing a speedy path to enterprise possession, and CEO standing, search funds have created a brand new breed of entrepreneur — those that embrace the notion of plug-and-play.

A crucial issue in the search fund equation is the financial upside searchers might see for his or her efforts. Historically, this has meant a 32.6 % internal rate of return and a 5.5x a number of on invested capital.

Related: How To Find Success During Search Fund Launches

Value creation

With competitors brewing in the type of fellow searchers and even some conventional personal fairness funds displaying curiosity in buying smaller companies, how do searchers obtain their edge? They look in the direction of combining two or extra corporations with synergies in dimension, geographic protection, key personnel or supply-chain benefits — in different phrases, a consolidation.

Programmatic mergers and acquisitions (M&A), according to McKinsey, “stays the least dangerous strategy with the smallest deviation in efficiency and the most important share of corporations that generate optimistic extra complete returns to shareholders (65%)” compared to massive one-off transactions, selective offers or natural progress.

What does this imply for searchers competing on the smaller finish of the enterprise spectrum? It represents a chance to deliver the tailwinds of M&A-based progress additional downstream, and to industries it has but to contact.

However, in a survey of 185 Entrepreneurship Through Acquisition (ETA) companies bought by Harvard Business School graduates in the previous decade, solely 8% have carried out a consolidation technique of shopping for a number of companies in the identical business vertical.


The timeline and construction of search acquisitions are sometimes restricted to two years. Additionally, searchers are sometimes freshly minted MBAs with restricted operational and M&A execution expertise, which makes including a further enterprise goal to purchase a frightening process. However, the advantages vastly outweigh the attainable draw back.

Related: Search Funds: What You Need To Know About This Investment Model


With this enterprise technique inherently being an operational play, key issues when in search of a second (or extra) goal might embrace monetary and additional operational synergies in the type of:

  • Capital construction enhancements from the mixed bigger dimension of the companies
    • Ability to tackle further debt at a decrease price
  • Capital depth discount
    • Shared fastened belongings, working capital and capital expenditures
  • Margin enlargement from better buying energy and unit economics
  • Valuation a number of arbitrage
    • In the same vein to “better than the sum of its elements,” companies when mixed, typically command the next worth than in the event that they had been to stand alone

Related: Data Security and the Downside Risk of M&As

Picking an business

With that, what can searchers do to additional de-risk a search consolidation? The reply to this lies in a refined thesis. Searchers with a background working in a particular business (i.e., healthcare) have an inherent benefit in launching a search with a centered thesis.

Finding an business to commit to might be difficult for these with a number of passions. However, the next markers might point out the appropriate match:

  • Fragmented business panorama (i.e., medical, dental, and veterinarian practices)
    • Industries in which enterprise homeowners primarily function a single entity or location
  • Mature and standardized business operations
    • Businesses which have relied on tried and examined practices through the years
  • A massive variety of corporations
    • Many companies serve the same buyer profile however in totally different geographies
  • A massive variety of corporations throughout the goal enterprise worth of the fund
    • Understanding the common worth of a enterprise in a goal business can assist filter out alternatives which might be both too small or too massive
  • Historically secure progress and sustainable revenue margins
    • Businesses which have operated profitably for a few years and serve clients who’ve (if B2B primarily based)

Picking a enterprise

Zooming in a layer deeper, corporations attribute of success in the search consolidation mannequin contact on a mixture of the next components:

  • Competitive business benefit
    • mental property, proprietary software program, and so on.
  • Seller motivated to exit
    • retirement, change in a succession plan, profession transition, and so on.
  • Historically secure recurring income
  • Strategic avenues for progress
    • geographic enlargement, advertising and marketing technique, recruiting key personnel, and so on.
  • Alignment with the monetary mandate of the search fund
  • Viable exit imaginative and prescient over a 5 to seven-year horizon

Eight p.c is a small however rising fraction of the ETA group that has chosen to tread the trail of consolidation. As extra seasoned operators and mid-career searchers get entangled, the chances of a consolidation technique changing into extra commonplace is just set to develop. This subsequent wave of search fund entrepreneurs might deliver revolutionary strategies in artistic financing, working and rising companies — a win-win for budding entrepreneurs and seasoned operators alike!

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