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Growth Through Acquisition: The Tuck-in
A smart growth-through-acquisition strategy can help build stronger margins – or restore eroding ones- in your company. In this market place, trying to grow organically and increase sales, capacity utilization, and net margins is a difficult scenario. But for the smart acquirer, a significant opportunity exists to roll-up a series of competitors or synergistic companies in the market vertical on favorable terms and in short order. Integrating a book of business with strong gross margins into your infrastructure, cherry picking employees, and selectively bringing in hard assets can yield quick returns.
We call this a “Tuck-In” acquisition, as you are essentially tucking in a book of business into your existing operations.
Let’s start with a few simple facts:
Your company must maintain a certain level of top line revenue to meet your overhead costs.
Your revenues must bear a certain margin level to meet your overhead costs.
In the face of a rapidly changing marketplace, industry consolidation, and a trend towards margin compression, you are struggling with both of those issues.
Companies in the marketplace will either innovate, grow revenues, and grow margins, or see those erode away in a long and agonizing slide.
You may not be faced with all of the above, and a long agonizing death might be not be spot on for you, but most in the industry will agree with the general thesis.
WHAT ARE THE ADVANTAGES OF A TUCK-IN?
Unlike a traditional acquisition in which an entire company is purchased, the tuck-in typically contemplates purchasing a limited number of assets and select liabilities. As such, the acquirer:
Adds several million dollars of top line revenue to their business.
Depending on the relative size of the companies, that added revenue may provide a very significant amount of Contribution-to-Overhead.
Higher utilization rates can reduce some of the pressure you are feeling on pricing. Adding a large chunk or revenues allows the company to allocate less overhead to each sales dollar- meaning you may not feel as if your back is against the wall on each and every quote.
Can diversify into fields or niches that help properly spread out and attenuate market risk. For instance, a commercial printer might choose to integrate a printer with a strong mail-house presence, thus offering a broader set of solutions to customers (and at less cost than developing that capability in-house and scaling up the book of business).
WHAT ABOUT THE COST AND DEAL STRUCTURE?
Yes, it clearly will cost something to execute a tuck-in transaction. At the end of the day the critical imperative is to present an opportunity with upside to the seller. In all likelihood you’ll be bringing that seller into your company with some variety of contingent compensation. But the seller needs to cover whatever expenses they may incur to complete the transaction (breaking a lease, legal fees, clearing existing debt), and also see some immediate upside to doing the deal.
That said, presenting a scenario that is attractive will help you get your deal done on favorable terms. Work with your investment banker to understand these issues and how to broach them with the target company.
RISKS ASSOCIATED WITH A DEAL
As with most business transactions tuck-ins come with risk as well. In all likelihood, sales will have some amount of decline while integrating the target’s book of business. The smart buyer will plan for this analyzing their deal. That said, though, the tuck-in can often be a much safer route than a stand-alone acquisition.
In a fragmented industry that is undergoing turmoil, the notion of purchasing a company on a stand-alone basis bears great scrutiny. If the company is healthy, commands a defensible market niche, and has strong recurring revenue streams, then a stand-alone purchase is a smart move. On the other hand, companies with commoditized product offerings or margin pressure might best be pursued as a tuck-in.
Clear Rock can help you analyze your current position and develop a strategy to execute one or more tuck-in acquisitions. With strong ties in the industry and a solid understanding of what companies might be “in-play,” Clear Rock is the go-to partner to execute your growth strategy.