Growth for services companies - M&A focus

I keep thinking about this subject all the time and many of my articles circle back to this subject that I am passionate about. Pls. visit my other articles on M&A tips for buyers & sellers (August postings).

There are 2 simple ways companies grow.

Organic - Growth from existing business line with new & existing client relationship/penetrations

In-Organic - Acquisition of companies (M&A)

Most companies in less than 500 Million bracket will shoot for 25 to 40% in Organic growth and will achieve it in this bull market. The remaining growth from In-Organic will depend on how much cash they can mobilize based on their standing in the market place.

Companies will have to think of this In-Organic growth from 2 different angles. In-organic acquisitions to show multiples or significant growth in the top line. Most companies do this to reach certain target revenue numbers, new market positioning, new client acquisition, new vertical/horizontal presence or new location presence. This is a very commonly used strategy. Companies in 75 to 100 M revenue will look for acquisitions in 10 to 20 M range, 100 to 250 M companies will look for 20 to 30M range and so on.

There is another In-organic growth strategy that most companies miss out is the 2-5 M target range. Many of the 2-5 M companies have growth problems. They can't spend money for sales & marketing, hire good people, invest in product development or delivery presence. More such companies can be targeted by the big players. A simple arrangement can be worked out (I mean deal structuring) which could be a mutual partnership approach with some growth targets. With this the small company and parent company can grow with a mutually beneficial arrangement that can lead to a full acquisition at a later date. There are many such companies in the

• Open source space
• Mobile space
• Security space
• Governance & Compliance space
• BI practice
• Small & Medium ERP space

These companies will be like pipeline generation for you for the next few years before they can get you 10-20M revenue after 3 years. Small companies left to themselves can't make it to 20M. Partnering/Merging with bigger companies can bring that result.