What is Corporate Development?
Corporate development is the business function of growing companies through strategic mergers, acquisitions, partnerships, and alliances. This function also is responsible for supporting the divesting of certain assets or divisions of an organization. Big publicly traded companies have whole departments whose main function is to support the organization’s strategic plan by effectively executing its merger and acquisitions strategy.
An acquisition strategy can take on many forms. It can involve vertical expansion (i.e. buying a supplier), horizontal expansion (i.e. buying a competitor), geographic expansion (i.e. buying a similar company in a different market) or product/service expansion (i.e. buying a company that provides a product or service that compliments your core offering). Every industry is structurally different, so each strategy needs to be customized to meet the specific needs and characteristics of the buying entity.
The Lower-Middle Market
For lower-middle market companies, having a complete corporate development department isn’t economically feasible. Furthermore, implementing a programmatic approach to executing a merger and acquisition strategy isn’t typically a core business capability of private companies in the lower-middle market. This can lead to this entire growth avenue being cut off and unavailable for a lot of lower middle market companies.
However, there is a large opportunity for privately held companies in the lower-middle market, which I loosely define as enterprises doing $5-$75 million in revenue, to implement a programmatic approach to growing through mergers and acquisitions. The opportunity for enterprise value creation for privately held companies in the lower-middle market fall into two main buckets:
- Organizational Design Enhancement – as a company grows and begins to experience the benefits of some scale, the organization needs to evolve. This is where most business owners are able to improve their quality life and transition from an ‘operator’ into a more strategic position (i.e. CEO) and promote internal talent into bigger roles. This organizational design helps create structure, systems and processes that allow for the company a foundation for future growth.
- EBITDA Multiple Expansion – companies in the lower middle market have a disproportionate opportunity to increase the value of the business through the unique size and scale that is achievable through executing a growth strategy involving strategic mergers and acquisitions. This specifically happens through a ‘multiple expansion’. Here is an example of what this looks like for a company doing $1MM in EBITDA, assuming no synergies to be conservative (please note this has been simplified for explanation purposes).
The multiple expansion occurs primarily due to the overall risk profile of a business decreases as the company gets bigger. On top of increasing the organization’s size, if a company also implements point #1 (the organizational design work), this multiple expansion could even be bigger.
In addition to the size, acquisitions can be very impactful to improving other business risks such as customer and supplier concentrations, buying/pricing power, product and service diversification, human resource depth and technology and operating capabilities.
Fractional Corporate Development Executive
How does a lower-middle market company execute on the value of growing through mergers and acquisitions without having the resources for a full-time corporate development department? A partnership with a fractional corporate development executive. These executives can seamlessly join your leadership team bringing both leadership capacity and M&A expertise necessary to execute a programmatic M&A growth strategy. A serious acquisition strategy takes discipline, focus and systematic leadership effort and a fractional corporate development executive can bring these things to your organization in a cost effective and flexible way.
The fractional business model has grown in recent years with the development of fractional CFO, COO, CMO, CIO etc. executives. When it comes through growing through mergers and acquisitions, this fractional business model works well. There is an incredible amount of work to identify, negotiate, close and integrate a merger or acquisition. It takes dedicated and focused leadership capacity to be done well. The entire M&A process takes a lot of time and energy which can lead to being a huge distraction to a business owner/CEO from the daily needs of operating his/her company. A fractional corporate development executive helps solve this unique challenge.
Programmatic Mergers and Acquisition Process
A programmatic merger and acquisition effort has a very systematic approach and requires discipline and focus. The below outlines a high-level corporate development process (I will outline a more detailed process in a future post). A couple important points regarding implementing a programmatic M&A process. First, a strategic growth plan that includes making mergers and acquisitions needs to fit nicely into an organization’s overall strategic plan. In other words, the strategic plan needs to come first. Second, for a feedback loop to be successfully implemented, the organization’s fractional corporate development executive needs to be 100% integrated into the leadership team. This ensures there is strategy alignment between the corporate development strategy and the overall strategic plan of the company. Being integrated into the leadership team produces a structure ensures clear and aligned communication as strategies get put into motion.
A key component of the below corporate development process is the feedback loop procedure where the fractional corporate development executive is constantly providing insights, information and other learnings back to the leadership team and allows for an active and healthy process of learning, documenting, reporting, and strategic plan revisions where and when necessary.
As a middle-market company, growing through mergers and acquisitions can be an effective growth plan to create shareholder value. Per a report by McKinsey, companies who follow programmatic M&A strategy and process enjoy a 65% chance of outperforming their peers. This data backs up the importance of hiring a fractional corporate development executive to provide sufficient capacity to run a diligent, focused, and disciplined M&A process.