If you are an executive of a middle-market company and are reading this article, congratulations! So far you have made it through the recent financial meltdown and depressed economic cycle. Like many of your brethren, you have likely cut costs to the bone, and perhaps are beginning to see a glimmer of revenue recovery from the valley of 2009/2010 when revenue may have slipped as much as 40% to 60% from its peak. After years of retrenching, many companies are now looking toward growing their top line, as additional revenue will provide the only means to increase profitability. Unfortunately, growing revenue is often a much more difficult, complicated and time-consuming effort than cutting costs, particularly in an economy that is arguably stagnant. What are some pitfalls and strategies you should be thinking about?

All Revenue Growth is Not Created Equal

Profitable growth certainly makes sense. Similarly, growth that consumes excess capacity or absorbs some portion of existing overhead may also make sense. I have seen too many situations where an owner or executive focuses exclusively on the top line, without considering other impacts this incremental business may have on an organization, such as depressed margins, consumption of working capital, different rights to return product and disproportionate use of company resources (senior management, IT, R&D).

Before embarking on any type of expansion plan, it is important to think through all of the ways in which your business may be impacted. I generally counsel my clients to reduce these thoughts to a written business plan accompanied by a financial forecast. The plan should serve as a roadmap for all involved and serve as one of several tools available to gauge your progress during your journey to grow revenue. Having your management team and other constituents on the same page will be very important. Your plan should be updated periodically as your expansion efforts unfold and you gain clarity. It should not be etched in stone.

Is Top Line Expansion Consistent With the Goals of Ownership?

If the shareholders intend to sell the company in the next year or so, embarking on a series of revenue-enhancing initiatives would generally not make sense, as these initiatives typically require a cash investment and take time to achieve a payback. Alternatively, if the hold period of the shareholders is longer, or if your company is owned by a private equity fund, revenue growth will likely be a very important initiative during the five-to-seven-year hold period.

Is Your Management Team Up to the Task?

Pursuing revenue growth beyond “normalized” year-over-year growth is not for the faint of heart. As part of your efforts, you should identify a “quarterback” along with a cross-functional group of employees to participate in the planning, implementing and monitoring of your efforts. The more input you obtain, and the broader the cross-section from which this input is obtained, the better the chances are that you will achieve greater success.

If your quarterback has not been through this type of exercise before, you may want to consider augmenting your team with an external resource. Generally, a consultant could either lead the initiative, participate as a team member or serve in a mentoring and monitoring role — depending upon the strength, skills and time availability of your team.

Should You Build or Buy?

Now we get to the fun part! In light of the totality of the situation, does it make more sense for your organization to pursue its expansion efforts via internal growth (i.e., build) or acquisition (i.e., buy)? There are obvious pros and cons to each approach, and these two approaches are not necessarily mutually exclusive. In some cases it may make more sense to pursue internal growth. For example, if your company has developed a novel retail concept, and you have determined to pursue an expansion strategy, it would likely make more sense to expand internally — by opening up new locations — rather than acquiring an existing business.

Organic growth generally takes longer to accomplish than growth via an acquisition, but it also entails less risk and more flexibility in terms of being able to adjust timing, financial commitment and course of action. Generally speaking, in an acquisition, the financial commitment is made on the front end, but the seeds to success are sown before (i.e., during due diligence) and after (during integration).

Establish the Criterion for Potential Acquisition Candidates

The most successful acquisitions are those that are based on a structured evaluation process. What gaps or needs is your company attempting to fill by making an acquisition? As discussed earlier, “more revenue” is not a suitable answer! For example, if your company is a manufacturer of branded crackers on the West Coast, any/all of the following would be reasonable objectives when considering an acquisition candidate:

  • Product Line Expansion — This might include expanding to items such as pretzel chips, baked pita, flatbreads or perhaps foods that are further afield from crackers — such as dips, spreads or cookies. The key in this approach would be to introduce the target’s products to your customer base and vice versa.
  • New Distribution Channels — if the cracker manufacturer sells to large supermarket chains, it may make sense to pursue acquisitions that sell through to different distribution channels — such as higher end gourmet shops or the institutional channel (restaurants, hotels, schools). Since our acquirer is regional in focus, it may make sense to target a company with overlapping or complementary product lines in a different geographic region.
  • Succession Planning — Believe it or not, many acquisitions are made as a means of “acquiring” a CEO or management team that can run the combined organizations. In these situations, one of the primary goals of the acquisition is to provide continuity for the acquiring entity, which may be important to the owners as a means of maximizing the value of their ownership stake.

Identify and Evaluate Potential Acquisition Candidates

Once the criterion for a potential acquisition has been established, the next logical step is to identify and evaluate potential acquisition candidates. From time to time, you may be made aware of a candidate that is putting itself up for sale. Your trade group or industry association may be a good source of information, or you may want to put out feelers within your own professional network. If your company is truly serious about exploring potential acquisitions, you may want to consider working with a third party that can assist in the identification (and possibly the evaluation) of potential candidates.

The use of intermediaries in this role is widely accepted and offers numerous advantages. First, most middle-market companies simply do not have access to the potential universe of entities that might meet their acquisition criteria. If you have determined to go down the acquisition path, it makes sense to cast as wide a net as possible. Secondly, it would likely be awkward (at best) for you to reach out to an entity that you may or may not be familiar with to inquire about its interest in being acquired. A third party can do this in a more subtle way that, initially, preserves the identity of your company.

As you develop your potential list you will likely be relying on market intelligence and incomplete information based on former employees, sales reps, common customers and vendors and a host of other sources. The relative rankings you may have penciled in originally will likely be updated as actual information is obtained. If there is an investment banker or business broker involved, there should be a steady flow of information and a stated timeline of events that will culminate in the sale of the target company.

If this is a proprietary deal whereby you are the only party in dialogue with the target, you may be more subject to the vagaries of the target’s owner. Selling a company often involves more than just dollars and cents. I have seen situations where the owner of a target company engaged in dialogue and negotiations with a potential acquirer that spanned more than 18 months. The potential acquirer walked away — primarily due to the wishy-washiness of the owner.

Be Disciplined!

It is very easy to become irrationally invested in a particular transaction, particularly if you have spent a considerable amount of time and resources pursuing it. It is important to periodically take a step back and re-evaluate the situation to make sure that the benefits continue to exceed the cost. You should consider all of the potential costs of a potential acquisition, and not just the purchase price.

For example, the combined entity may lose a key customer or supplier as a result of the acquisition, or a vendor that previously provided 60-day terms (based on a long standing relationship with the owner) may take the opportunity to reduce terms to 30 days, which will require more working capital. These outcomes will likely not be known at the time an offer is made, and in isolation may not be game breakers, but someone representing the acquirer needs to keep track of these potential value degrading items in order to maintain objectivity throughout the process.

Due Diligence

A bargain basement acquisition price may ultimately prove to be costly if important items are not uncovered during due diligence. This is arguably one of the two most important elements in making an acquisition successful. The other is integration, which I will touch on later in this article. It is critical that you have a thoughtful, detailed, well-coordinated and robust due diligence process. This is another area where utilizing a third-party resource often makes sense.

When advising clients that are pursuing acquisition candidates, my approach to due diligence is that the information should be compelling enough to persuade us to do the deal. In other words, I assume the target is guilty and that the information obtained in due diligence is the icing or straw that convinces us to do the deal. While I am admittedly exaggerating my perspective for effect, you get the point. It is the acquirer’s obligation to ask the right questions, and all of the right questions, in order to become satisfied that all is what it seems to be. Do not rely on representations and warranties or insurance that may support these standard provisions in purchase agreements as a substitute for due diligence.


Okay, documents have been executed, capital has been raised, money has been borrowed and the acquisition has closed. Congratulations! Your 100-day plan should have been completed days or weeks ago, and the folks responsible for the various integration and implementation elements should be hitting the ground running. With most acquisitions, there are some items that will be integrated day one, and some items that will require a bit of study and deliberation. The speed at which the two entities can be integrated, best practices from each adopted and change implemented will often translate to enthusiasm and motivation on the part of the management team, synergies in operations and the ultimate goal of most acquisitions — increasing profitability and enterprise value. Set a timeline and stick to it!

In today’s economic environment, maintaining market share and revenue are oftentimes a daunting challenge. Growing revenue — even more so. If you conclude that the acquisition route is a good mechanism to achieve this growth, proceed cautiously! With the proper planning, third-party involvement, due diligence and integration, you should be able to make it a successful effort.

Michael Jacoby is a managing director and shareholder at Phoenix Management Services, and is a skilled financial executive with extensive operating, turnaround and commercial banking experience. Jacoby has served in advisory capacities as well as interim management positions for more than 190 Phoenix clients in a variety of industries. He has also been instrumental in assisting numerous clients with their financing and divestiture needs. Jacoby can be reached at mjacoby@phoenixmanagement.com. For over 25 years, Phoenix has provided smarter, operationally focused solutions for middle-market companies in transition. For more information visit, www.phoenixmanagement.com and www.phoenixcapitalresources.com.