Business owners today cannot afford to ignore the world of M&A — even if they’re not actively looking to buy or sell. That’s because your competitors are out scooping up a new technology, diversifying into new geographies, pinning down their value in order to raise capital without dilution and implementing long-term plans that help them run their companies better.
There’s a reason North American M&A has retained momentum from a strong 2018, closing 4,754 deals worth $849.7 billion in the first half of 2019, according to Pitchbook.
We spoke with executives, serial entrepreneurs and advisers who handle transactions every day about the role of mergers, acquisitions and dealmaking in business today. Here’s what they had to say.
Breaking growth ceilings
Mark Kovacevich, president of North American operations for Improving, is involved in all aspects of dealmaking — from identification and transaction development, to due diligence and integration. The Texas technology management and consulting firm, which is on track to do $100 million in annual revenue this year, has purchased six companies since 2010.
Kovacevich started an IT technology firm in Columbus, which was acquired by Improving, and he’s been with the organization ever since. Today, he’s responsible for strategic mergers and acquisitions, as well as international operations, execution, corporate integration and implementation of Improving’s vision and purpose.
“When I chose to go with Improving to be acquired, I was looking to be able to tell my story quicker and at scale. I was trading time and speed,” Kovacevich says. “The story of scale is so much more powerful in our business than it is in some other ones.”
From the buyer side of the deal table, Kovacevich holds up Improving’s leadership development and other initiatives as a way to help acquired organizations jump to the next level.
He says this is important because businesses hit plateaus and bump into ceilings. In Improving’s industry, those road bumps often come at the $1 million mark, the $5 million mark, the $25 million mark and the $50 million mark.
“Many times, entrepreneurs are so intimately involved in their business that, at some point along that organization’s lifecycle, they are actively impeding their own growth. They don’t know it, though,” Kovacevich says.
It may require someone else to help apply processes, systems and leadership to knock that ceiling up into the next phase of growth. And in Improving’s case, the company isn’t looking for owners to hand over their company and ride into the sunset. It’s looking for partners who want to scale their organization.
“That’s one of the reasons I think business owners should be very in tune with M&A. You have to be honest with yourself: Am I the reason my business is not growing? It’s a hard thing for entrepreneurs to answer, because at one point in time, they were the reason that the business was growing,” Kovacevich says. “So, you have to apply a little bit of self-awareness to be able to navigate that and maneuver within that ego that ties people up.”
In addition, while acquisitions are integral to Improving’s growth strategy — allowing the firm to diversify in geography and add service capabilities — acquired growth doesn’t have to come at the expense of organic growth, he says.
One example of this is Improving’s Houston enterprise. In 2012, when it was acquired, the company did about $500,000 in revenue. This year, the Houston enterprise is on pace to exceed $15 million in revenue.
“We believe that through leadership, development and coaching, we can unlock these enterprises’ growth. Each one of the enterprises that we have acquired has accelerated to varying degrees, and it has sustained growth organically,” Kovacevich says. “The acquisitions give us that big spurt, that big injection of growth.”
Pinpointing value, making connections
Serial entrepreneur Hugh Cathey has a slightly different perspective. The CEO and chairman of ChromoCare is running his ninth startup. He doesn’t build a company to sell, he builds a great company that then attracts buyers.
“That’s not really your shining star that you’re headed after, but it is one of the measurements of how good a job you’re doing on building a company,” he says.
Cathey spends more than half his time understanding the roadmap of where ChromoCare needs to go and how it gets there. Part of that involves staying connected to dealmaking, which helps him understand the value of his company.
If you’re out raising capital, he says, you need to know the proper valuation of your company — and that requires more than just sticking your foot in the water once a year. Cathey also can use this information for business development. If he notices a venture capital firm invested in a company in his sector, he’ll look through its portfolio to see if it’s invested in businesses that could be customers of his company. He isn’t afraid to pick up the phone to see if he can make connections and get ideas.
“In the Midwest, it’s very, very common that I read about a company that’s being acquired. I find out who the CEO is, reach out to him, and nine times out of 10, they take your call and they’re willing to share non-proprietary data or information with you about the space,” he says.
Cathey likens it to a football team — you constantly want to know what the other teams are doing and what their best practices are.
“You want to be fully expert in your industry — not just your product individually, but your industry in general — and the only way you can be expert is if you are paying attention to what’s going on,” he says. “Are financial investors, as opposed to strategic investors, coming into your sector because they see the potential for a rollup or for bringing two technologies together, where one and one equals three?”
Or, do you want to hold off on a sale, because a university is developing a technology that could help create a quantum leap forward in terms of valuation for your company? If so, does that mean you need to find a private equity partner that’s prepared to wait, that can buy out your early VC partner?
“It’s easy to get so focused on what you’re doing that you’re always looking inward and you’re not looking outward,” Cathey says. “It’s smart to look outward from time to time and really understand the ecosystem that you’re working in.”