Strategy Session: The Strategy Behind Strategic M&A Transactions

Discover proven, accessible approaches to thinking strategically about your business in order to make more informed decisions, with a focus on the six business drivers that will put you in a position to succeed.

By Bryan E. Pearce
Director of Strategic Business Planning
Gray, Gray & Gray, LLP

Successful entrepreneurs and business owners understand that there are options to accelerate growth through the use of strategic merger, acquisition and alliance transactions – collectively known as M&A.  How can such transactions be used to add value to a business, and what are the related considerations?

Types of transactions

Growth can come from internal sources that the business already has – often referred to as “organic” growth – or from the use of strategic transactions. These transactions fall into a spectrum, including:

  • Alliance where little or no equity or control transfer is involved but where there is a sharing of people, marketing, sales and product & service resources;
  • Joint venture which has more formal structure, typically evidenced in a comprehensive written agreement;
  • Direct equity investment in a target company, from a minority interest all the way to a full acquisition of 100% of the target company’s business; and
  • Merger, where two companies with complementary offerings believe it would be advantageous to go to market as a combined business or new entity.

How are these transactions beneficial?

It is often helpful for a business to think of its growth options, relative to new and existing customers, products and services, in a 2×2 matrix:

Once you have identified strategic opportunities for new customers and new products & services, the question becomes how best to obtain those: organically or by strategic transactions of one or more types?

Successful entrepreneurs consider using strategic transactions for accessing new solutions, often in a more rapid way than developing them internally. These solutions may include new:

  • Customers
  • Products & services
  • Business models
  • Technology
  • People/teams
  • Geographic markets

Questions to ask before taking the M&A plunge

Once a business leader has determined that they want to consider strategic transactions as part of their growth strategy, there are a number of common questions to work through.  Obviously, these will vary greatly based on the circumstances of the particular business, but there are some general things to consider.  These include:

How do I source the right strategic transactions?

The starting point is to clearly define what solutions you are looking for, as outlined above. Then business targets can be identified through research or using connections like business brokers, investment bankers, accountants, lawyers, your Board of Directors or Advisory Board, or discussions with industry peers.

How do I value a target business or relationship?

Valuation is a critical issue in strategic transactions.  If the transaction is an alliance or joint venture, typically each party may be bringing different assets and expertise to the table. The parties agree on some form of commission, revenue sharing or profit sharing relative to business generated by the alliance or the joint venture that reflects what each party is contributing.

For equity investments, acquisitions and mergers, typically the whole of the target entity is valued based on a multiple of revenue, EBITDA, cash flow, and other factors that are specific to the industry, marketing or current economic conditions. Then the value of the percentage being acquired is applied, likely varying somewhat depending upon whether a controlling position is involved.

How do I structure and finance the deal?

Deal structures also vary greatly depending upon the type of transaction, and the preferences and tax positions of the parties to the transaction. Typically, the acquisition of a business can be either for the shares of or equity in that business, or the (net) assets of that business.  Payment usually takes the form of cash, shares of the acquiror, or debt back to the vendor.

How do I run my existing business while exploring strategic transactions?

It is important that there are clearly defined responsibilities for the business leader and their team when actively involved in executing a strategic transaction. Who will have responsibility for managing the existing business? Who will be responsible for the various steps in executing the strategic transaction?  It is very important, particularly if the acquiror is raising capital to fund the transaction, to ensure that the original business(es) continue to run according to plan while the strategic transaction is executed.

How do I successfully integrate the strategic target into my existing business?

In order to maximize the value of any strategic transaction it is important to determine how it should be integrated or connected with existing business(es). This involves assessing the synergies that arise in management, administration, sales and marketing channels, production, and supply chain. Redundancies that may exist within administrative and overhead functions must also be addressed, as reduction in overhead may offer significant economies of scale.

While strategic transactions require a good deal of thought and advance planning, they can be a great contributor to accelerating the growth and value of a business, particularly at a time of economic stress when many target businesses may be available at relatively low valuations.

Want to know more? Get in touch with Bryan Pearce, our Director of Strategic Business Planning, at (781) 407-0300 or at to explore how we can help you define your own future.

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