Mastering the art of building up.

The key steps of a winning strategy.

In order to grow, companies resort to levers of organic growth as well as external growth, the latter being a (very) value-creating driver but also financially accessible through leverage. However, it remains underutilized by SMEs in France.

At OutMatch, we are committed to SMEs and ETIs to change this situation!

External growth enables expansion through the acquisition of external entities, primarily aiming to increase the company’s revenue, extend its geographical reach, strengthen its market share, and/or acquire new competencies, for example.

However, executing an external growth strategy requires meticulous preparation, our secret sauce being the definition of clear objectives, identification of appropriate and actionable targets, seamless integration, value creation through synergy activation, and adequate financing to ensure real success.

Two prerequisites must be met to embark on an external growth strategy confidently:

  • Define your three-year organic growth strategy (define objectives, business lines, targeted geographic locations, capabilities to develop).
  • Have healthy, autonomous, well-managed historical companies that offer the opportunity to allocate resources to research, supervision, or integration of new assets.

  • Ask yourself the right questions:

To establish a strategy and identify the appropriate acquisition target, it is crucial to clarify the objectives pursued through this approach:

  1. Acquisition of specialized skills: Identify and integrate necessary experts to strengthen your company’s capabilities in key areas.
  2. Expansion into new markets: Explore new opportunities in terms of geographical location or target customers, either by opening new sites or acquiring different market segments.
  3. Diversification of offerings: Expand your portfolio by acquiring companies from other sectors, thus enriching your offering and enhancing resilience against economic fluctuations.
  4. Increasing visibility: Increase your company’s presence and influence by expanding its size and footprint in the market, thereby enhancing its visibility and credibility with stakeholders.
  5. Elimination of competition: Dominate your sector by absorbing potential rivals through strategic acquisitions, thus consolidating your position and strengthening your market leadership.

 

  • Identify Achievable Revenue Synergies

Acquiring a new company offers the opportunity to generate synergies that will positively impact your revenue in several ways:

  1. Expansion of historical customer base (up-selling): Monetize new market segments (target customer base). Development of product/service portfolio (cross-selling): Create more comprehensive and attractive offerings by integrating the products or services of the acquired company, and vice versa.
  2. Access to your customer community at a lower cost (reduction of CAC): via the integration of an actor targeting the same customer base but with a different value proposition, allowing you to decrease your customer acquisition cost.
  3. Price optimization: Optimize price control by reducing competition in your catchment area and consolidating your market position.
  4. Acquisition of distribution channels: Expand your reach and enter new markets more quickly.

Revenue synergies aim to (i) boost your growth and (ii) maximize your revenue by leveraging created synergies (1+1=3).

  • Identify Achievable Cost Synergies

Acquiring a new company offers the opportunity to achieve synergies in costs, which will optimize your company’s operations in several ways:

  1. Economies of scale: Reduce costs related to production, goods acquisition, distribution margin, administration, and other operational functions by benefiting from larger volumes and streamlining processes.
  2. Process optimization: Remove redundant processes and create common processes to gain efficiency and reduce associated costs. Rationalization of various fees: accounting, legal fees, etc.
  3. Reduction of real estate and infrastructure costs.
  4. Support function rationalization/Staffing rationalization: Optimize your staffing in support functions by eliminating redundant positions and reorganizing teams to better meet the needs of the combined company while valuing key skills.
  5. Marketing cost reduction: Opt for a joint strategy by combining your communication networks and harmonizing your efforts, and establish connections between your advertising channels to amplify your brand awareness.
  6. IT cost reduction: Consolidate and streamline your IT systems and processes to reduce maintenance, management, and upgrade costs. Achievement of tax savings: Benefit from tax advantages through the consolidation of financial structures (additional tax deductions, tax savings, etc.).

These synergies aim to maximize operational efficiency while reducing costs, thereby promoting improvement in your company’s profitability and competitiveness.

 

  • Identify a Target Aligned with Your Objectives and with Easily Projected Synergies

Identifying the appropriate target involves several steps to assess its potential, compatibility with your organization, and ensure your integration capability. Remember that in the context of a process, it is primarily a seduction process aimed at appearing as a unique opportunity for your target.

  1. Analyze your value chain to find actionable targets, in line with your search criteria.
  2. Meet, seduce, persuade, engage: Establish a connection with your target. Understand its market, positioning, specificities, and project your integration.
  3. Present your offer: (i) present your understanding of the market, (ii) your understanding of the company, (iii) the development potential of the project (iv) why you are one of the best acquirers and how you meet the seller’s needs, (v) valuation, payment sequencing, and financing.
  4. Conduct due diligence: Carry out thorough audits, both legally and financially, to assess all aspects of the operation.
  5. Finalize the agreement: Proceed with the conclusion of the operation (closing) and prepare for the next steps for a successful transition.

Your OutMatch advisor will accompany you through all these steps, with its unique methods in the market dedicated to one goal: the success of your operation.

 

  • Maximize Your Value Creation During Acquisition

One of the objectives, in addition to your collective human history, is to maximize the value of your shares. To maximize the created value, several options are to be considered:

  1. Acquire a company at a lower valuation multiple of EBITDA than your group: Acquire a smaller target, and/or valued at a lower EBITDA multiple than your historical company. This EBITDA will automatically appreciate post-transaction at your (higher) market multiple, thus revaluing your historical shares.
  2. Pay the target via stock exchange: Gain control of the target without mobilizing cash or debt to complete the acquisition, via stock exchange. The seller will then automatically gain in the valuation of its shares post-transaction, the gain being linked to your higher valuation (slider to adjust during negotiations).

  • Find the Right Sources of Financing

Two types of financing are (generally) used for external growth financing:

  1. Non-dilutive financing (debt): Use of bank loans (difficult to provide general cases as it is closely related to the historical company of the acquirer and the relationship with the historical bank(s), but it is possible to target up to 3x the amount of EBITDA (i) of the target company and (ii) of the acquirer). Use of mezzanine debt, possibly up to a leverage of 5x EBITDA (difficult also to provide a general case, it depends on the ability of the acquirer and the target to meet their repayment deadlines).
  2. Dilutive financing (capital opening): Opening the capital to an investment fund. Contribution of personal, family, or network funds of the acquirer (love money). Association with another acquirer to complete a possible round table.

Other financing instruments are conceivable and are not mentioned here for the sake of synthesis.

 

  • Structure Your External Growth Strategy Serenely!

The success of your operation will depend on the perfect definition of your external growth strategy, the proper identification of target companies, the proper conduct of the acquisition process, the financing of your target, and finally its seamless integration.

In a nutshell:

OutMatch supports you in implementing your external growth strategy by providing you with its expertise, creativity, determination to succeed, and innovative solutions to advise you at every step, and help you make the best decision for your company.

To discuss your M&A and value creation considerations, feel free to send me an email at: maxime.nicolas@outmatch.fr

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