M&A or Organic – Choosing Your Growth Strategy as an Independent Sponsor

How do independent sponsors and capital providers look at growth strategies and leverage M&A and Organic Growth – what metrics do they use to decide on either strategy and how do they align their approaches to make it all work? David Hobbs at HTR Capital, Grant Kornman at Align Collaborate and Adam Wise at Penstock Equity sat down with Brian Korman of Ice Miller to explore this topic.

Choosing Your Strategy

Grant Kornman shared how capital providers think independent sponsors should look at choosing a strategy, noting that professionalizing your platform quickly is essential – the quicker you upgrade your systems and teams the sooner you have the framework to support accelerated business growth. Oftentimes accelerated growth means utilizing M&A early - especially for small businesses in the $2-$8 million EBITDA range.  M&A can enable them to scale up quickly – to then be in a position to attract and afford a CFO and other business driving professionals whereas relying on organic growth may take too long.

Adam Wise agreed but added that you must have a multi-pronged approach. You can’t just count on finding an acquisition early – you must have an organic growth strategy that you can count on as well while you look for that acquisition.

David Hobbs doubled-down on that – stressing that for true multiples expansion you must have an organic value creation approach that works.

Grant also noted that for independent sponsors concerned about management fees, M&A activity will have a faster impact on their fees revenue as they are tied to EBITDA usually.

M&A Synergies that Matter

Brian then asked the group about what synergies matter when looking at acquisitors. Sales synergies are often over-rated, said Adam.  They look good on PowerPoint but are hard to realize and execute – and can take longer even when they work. David mentioned that they only look at purchase synergies as others are harder to value.

Grant added that many of those synergies are harder to underwrite. There are so many different types of independent sponsors – ones with transactional experience often think those sales synergies are easier to attain than ones with operator backgrounds who have a more realistic view.

Sequencing Matters

Brian then posed the question: how do you know when the company is ready for M&A? David stressed that you need to have a good core of people on the management team or good outside resources in place before you implement an M&A strategy. You have to be on solid footing. M&A can still be ugly but if you have the right people in place it can work.

Grant took a slightly different tack, noting that M&A takes time so you need to work on your M&A strategy on a parallel track with your organic growth. It helps as well to have sellers in your platform investment who stay on board – they can help identify potential companies to acquire and have the contacts in the industry.  They can also keep the business running well while the strategies take effect.

Adam added that the highest likelihood of success starts with the existing management team. You should be having conversations with them about your acquisition and organic growth strategies during the diligence process to get their feedback (and buy-in) on what they feel would work. Grant agreed, stating that the best M&A strategies include having someone in the company who communicates with the seller ensuring  they  feel comfortable with the sale.

What Matters Most?

Adam stressed that you have to have buy-in. Cultural alignment is essential – you don’t want your own management team working against you. David added the management team needs to have a comfort level that their staff and operations will be treated well to get that buy-in. Offering references can help here.

Selecting the Right Capital Provider

Brian asked the group what matters most when an independent sponsor looks for the right capital provider. David was clear that you don’t want to go with a capital provider that’s using their last investment dollars for closing. You want a runway – a capital provider who can add more capital if needed. He added that you also want a partnership – don’t negotiate so much on basis points that you have soured your relationship with them – you want a partner.

Adam noted that with debt you want a partner that can scale with you. With equity – you need to be clear with them early on that you will likely need more capital later to see if they buy-in to that. You want a capital provider who can add more capital. It’s more complicated to add a capital provider later in the process.

Grant wound up the conversation by stating that your pace as an independent sponsor should match that of the capital provider. If you’re aggressive as a sponsor, can the investor keep up? Some capital providers are happy to come in later on in the process when you’re ready to scale, but you need to weigh that against the expectations of your original investors.