Business plans are essential to launch a business. They’re also essential to grow a business. If your goals include inorganic growth, it’s necessary to plan for mergers and acquisitions. Focusing on these key business plan components for inorganic growth can help you create a clear, comprehensive strategy.
Goals and key financial and valuation metrics. Your goals and metrics for launching and running your business will be covered in a business plan for organic growth. But to grow inorganically, you’ll also want to indicate goals and key metrics for what that growth will look like. A plan should include:
- Parameters and guidelines for desired size, new offerings, and new markets
- Expected ROI & ROE from the investment
- Total payback – What will you expect to gain after one year? 5 years? 10 years? It’s important to have a general consensus to what your minimum must be (e.g., total payback in five years in after tax dollars).
Market research. Another component to think through and document is benchmarking. This includes a plan to ascertain what you do for your customers now and in the future, and what your competitors are doing. Plan for gaining:
- Customer feedback – How are you serving your customers, and how will you serve them better through a merger or acquisition? Make sure you talk to customers directly and not just your own people.
- Competitive analysis – How will inorganic growth allow you to get ahead of the competition and in what areas?
- How will you determining what markets you need to expand into? Is the market saturated? A good tip is to make sure at least part of this is a customer-driven strategy that allows you to support existing customers better.
Identification of target companies. It is not too early to identify the types of companies you’ll want to merge with or acquire. Create a persona of that company – their size, revenue, capabilities, and infrastructure. Determine the criteria that will put those companies on your radar and your vehicles for approaching them. Also, document what due diligence you’ll perform to properly vet these targets and how to integrate them.
Deal structure and valuation. One of the key business plan components for inorganic growth is defining deal structure. This includes how a merger or acquisition will be financed, and how payments and earn-outs will be handled. What will be the plan for incentives and key people? How will you value businesses going forward? Reaching a general consensus with the board, bank, senior management, and shareholders will eliminate confusion down the road when it’s time to pull the trigger. One example of indicating this is: “We will generally pay companies a multiple of their ‘adjusted EBIT’ of 4 to 7 times payable in cash at closing, seller note, and a performance based earn out.”
Financial impact. The plan should include a pro forma projected cash flow, balance sheet, and income statement for each potential transaction. Each deal should “stand on its own” and be measured accordingly, especially if there is a performance based earn-out for the sellers. Determine what’s going to be required to finance these transactions in cash, stock, or seller notes that pay interest. By knowing, modeling, and sharing this with your bank, you can help ensure there are no surprises about future financing. If you are a fairly healthy company with a decent track record, the bank will usually be receptive to the idea of loaning you more money to grow.
Negotiations. It’s important to incorporate a plan for negotiations: Who will represent your best interests? What factors will be non-negotiable? What will you be willing to offer, and what is your ideal return? It is critical to establish an internal senior point of contact to act as a liaison to your M&A advisor and to watch over the process from identification of the target through integration.
Integration. Finally, a business plan should define the integration with the new company after the merger or acquisition. Review the keys to a successful integration and document how your company will address sales, service delivery, human resources, and back office and IT.
Covering these key business plan components for inorganic growth will help ensure your company is well-positioned now and going forward.
Steve Pomeroy is the founder of Big Change Advisors, an M&A consulting firm in Los Angeles focusing on middle market companies in the IT services space. Since 1992, Big Change leaders have completed over 36 transactions including M&A, Capital Sourcing, and Public Offerings representing over $800 million in total transaction value. Big Change Advisors donates a percentage of all fees to help serve the homeless through the Los Angeles Mission. To request a free consultant, contact us.