In the last blog in this series (MSP Acquisition Model Overview | McMann & Ransford), we outlined a deliberate process to help Managed Service Providers make the best business acquisitions based on their strategic, financial, and growth goals. Targeting potential acquisitions is the first step in the process.
The objective of this phase is to create broad list of possible targets that fit the strategic criteria and narrow it down to a “short list” of prospects that will be contacted to begin mutual evaluation.
First, the targeting criteria for strategic fit are developed. Depending on your needs, each criterion may require a unique acquisition, or one target may meet multiple needs. (This situation is further considered as you narrow the prospects.) When determining the criteria for strategic fit, consider the following as it relates to your portfolio strategy of products and services:
- What new markets are you trying to enter and/or existing markets to grow your business?
- What new customers in those markets are you targeting and trying to obtain?
- What existing customers will you target to expand your business and which ones must you defend/maintain?
- What are the greatest challenges facing those markets and target customers that want – or need – your help to solve?
- Which executive buyers do you want to have more meaningful and deeper relationships with or greater access to?
- What capability and intellectual property (IP) gaps do you want to fill?
- What capabilities or IP do you currently have that you want to augment?
- If applicable, what gaps in technology are you looking to fill?
After defining the criteria, you can build a list of possible acquisition targets. This step often entails:
- Researching potential targets in trade publications, professional organizations, and online,
- Leveraging your team’s knowledge and referrals, and
- Engaging customers to help identify targets.
At this point, you will want to think very broadly about potential targets to ensure sufficient options are available and opportunities are not missed.
Finally, you will narrow the targets to a viable list of prospects for more detailed evaluation. Placing the targets on a “Targeting Matrix” will assist you to visualize the relative merits and challenges across the full range of targets. Often this exercise will further clarify your priorities.
Typically, a basic 2×2 of what you believe are the most important strategic criteria is the best starting point for the matrix. Additional criteria (such as size, breadth of the target’s portfolio, industry or segment focus, or complementary products and services, talent capacity and capability, etc.) can be captured visually by size, color, shape etc. of the icons in the matrix. Targets that meet multiple criteria are often a better “fit” in the Target Phase.
In this example, companies 2 and 7 have a strong fit for both primary criteria. Size and color of the icons would provide further insight. Additionally, depending on the importance of criteria A and B, other targets may prove attractive or be ruled out. In a recent client example, one axis represented exclusive focus on an industry segment and the other axis represented exclusive topical focus. After seeing the matrix, the client determined that the industry segment focus was essential, thereby eliminating a substantial number of targets from consideration.
After using the Targeting Matrix to hone your criteria and narrow the target list, you are ready to move to the Evaluate Phase.
For additional McMann & Ransford insights specific to the MSP market, please visit Managed Services Providers | McMann & Ransford – Management Consulting.