Situation: A CEO is building a 10-year growth plan for her well-established company. Options include building the company on its current track, growing through purchase of another company, or merging with another company. What are the most important considerations for each option? What is your 10-year growth plan?
Advice from the CEOs:
- Considerations to start the process:
- When acquiring another company or merging, the value is the reputation, relationships, and good will of the other firm. This may be more expensive but can provide a head start in the new market.
- Perform an ROI analysis of build vs. buy. Estimate what it will cost to build. Compare this to what others are asking for their firms. In both cases generate a 5-year cash flow forecast. Discount future cash flows using the company’s desired rate of return – for example the company’s PBDI&T target – as the discount rate.
- Also compare the relative risk of each option.
- Build Option:
- It’s not necessary to recreate the full home office operation.
- Start small – sales, support, or maybe just an address.
- Do the actual work at the home office until sufficient business is generated at the new site to support a larger local operation.
- Buy Option:
- Look for a company with a good local reputation, who shares the acquiring company’s values, but who wants to sell.
- This option provides staff, relationships, and a reputation in place. They will already know the local code.
- Structure a deal for long-term value to the owner. The ideal is to pay as much as possible with future rather than current dollars, with a premium for high retention of personnel and business
- Spend some time in a new area and get to know it before deciding. If the company already does some business in the new locale, this simplifies the decision.
- Some locales have been found by others to require a local head of the office who is from the area – who “talks the local talk and walks the local walk.” This will be the case whether the decision is to build or to buy.
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