By: David S. Bauders, CEO, SPARXiQ
Every business needs a growth strategy, and acquisitions play an important role in this for many distributors. A steady plan to incorporate small acquisitions annually can accelerate a company’s attainment of economies of scale and critical mass, while unlocking significant synergies from gains in each of the profit levers: pricing, sales, cost of goods, and cost to serve. In this post, I’ll cover how the tightly linked topics of sales and pricing play into acquisition opportunities.
In addition to expected customer benefits, acquisitions must deliver financial benefits to the acquirer, such as expanding the addressable customer base or increasing addressable share of customer wallet. Acquisitions must also improve margins through new pricing strategies and systems. Because many distributors have immature sales approaches and pricing practices, acquisitions present a two-fold opportunity: growing top-line sales and growing profitability within the acquired organizations.
Analyze Sales and Pricing Opportunities of Prospective Acquisitions
Early in the acquisition evaluation, potential acquirers should assess the structural characteristics that support success, such as value proposition, competitive positioning and differentiation, and industry structure. Later, in the due-diligence process, analyze transactional datasets to assess opportunities to grow revenue and improve margins. It’s common to identify share-growth opportunities equal to 10 to 20 percent or more of revenue (can equal 50%+ gain in EBITDA).
Pro forma analyses assess opportunities in sales, such as quote conversion, new-customer acquisition, improved customer loyalty, reduced customer defection, and increased addressable customer wallet and share of wallet/cross-selling. In doing this type of work, we’ve commonly seen pricing leakage due to excessive customer discounting, missing premiums on low-sensitivity products, poor ERP functionality, unstructuredcontract pricing, and even low e-commerce adoption.
Developing Synergy After Acquisitions Occur
In the early days post-acquisition, the key objective is communication and minimizing customer and employee frictions. That means maintaining sales coverage, minimizing price changes, and likely maintaining separate ERP systems (or separate instances of a common system). Essentially, the acquirer and the acquisition maintain their independent business practices. Sooner than later, however, the synergies will need to be developed, validated and implemented. Assessing your both your existing business’s and your acquisition’s transactional data is key to understanding the opportunities and the challenges, and to capturing the synergies to convert to shareholder value.
The Customer and Product Overlap Question
Whenever the acquirer and the acquisition have overlapping products and/or customers, a critical question becomes how to identify and rationalize the competing choices to optimize top-line revenue and bottom-line profits. In a common example, 10 to 20 percent of revenue comes from common customers, and 10 to 20 percent of revenue comes from common products. Correctly measuring the magnitude of this issue is critical because product and customer numbering conventions are often disparate between companies.
If the two organizations have common product lines, the sales rationalization is relatively simple and additive, which means each customer continues to buy from the common line card. In the case where the vendors are competing, it’s critical to determine which product lines will carry forward versus getting dropped. In some cases, one product line can be repositioned in a good-better-best framework to give customers the value choices they need to prevent unnecessary defections.
The Question of Integration versus Autonomy
Many acquirers, particularly strategic buyers already operating in a particular industry, fully intend to integrate, or “fold,” their acquisitions into their existing operations. When the primary intended synergies involve expanding sales to common customers or providing new channels for existing products — or perhaps rationalizing duplicative resources — integration makes sense. Where new, non-overlapping markets and localized market savvy are considered critical factors, however, a “hands-off” approach may be appropriate. In this case, the synergies will have to be resource-sharing and back-office savings. A key question is whether the net benefits of integration will exceed the net benefits of autonomy.
Capturing the Sales & Pricing Opportunity
In the integration case, with significant overlap of products and customers across two businesses, we first map products between the organizations to identify market issues of product redundancy. The two businesses may have common products with different internal naming and SKU-number conventions (a cross-reference rationalization). Or they may have competing products of varying value alignment — where the challenge is more around positioning (good-better-best) and optimization of pricing differentials across complementary product lines.
In simple terms, when common customers have multiple product options at different legacy prices, from overlapping sales reps, there will be significant potential for conflict and friction. Margin erosion can also happen as customers cherry-pick lower prices from inconsistent pricing across organizations or migrate to lower-value commodity alternatives. Product rationalization is critical to setting up the sales and price optimization initiatives.
In the autonomy scenario, the pricing and sales optimization opportunities are distinctly different. Here, the challenge is to transform the pricing and sales disciplines within the organization, while still respecting the need for local savvy and entrepreneurship. The issue is how to develop common core competencies in pricing and sales while preserving local entrepreneurship. These competencies support rather than undermine autonomy. Many organizations have been unsuccessful in developing core competencies under the weight of expectations to “leave them alone and let them sell.”
Acquisitions Increase Customer Value and Scale Enterprise
Properly positioned, acquisitions provide a significant opportunity to increase customer value and build enterprise value and scale. Analytics help frame the opportunity, the challenges, and can also help to capture the synergies post-acquisition. Whether leaning towards autonomy or integration, the key is to build data-driven capabilities that support real gains in pricing and sales. With the right playbook, the results justify the efforts.
