Within a number of industries, consolidations have become a way of life. Smaller, independent companies that wish to compete effectively within this changing and more demanding environment must consider new growth strategies. One of these could be termed a “mini-niche consolidation.”
A mini-niche consolidation may relate to a market segment, a product segment, or a geographic area. Such consolidations may fall below the radar of the large consolidators, yet these structures can effectively complete with much larger competitors. Effectively positioned, the sum of the components should be greater than their individual parts. Profitability can be greatly enhanced by taking advantage of the savings in overhead, personnel, and processes.
As smaller companies participate in min-niche consolidation, their motivation for acquisition or divestiture is greatly increased. A well though out strategy by a professional M & A firm, such as Irons Group Ltd., can results in a win, win scenario. The most successful strategy would include these elements:
- While one of the platform CEO’s must assume the leadership role, the other CEO’s must maintain a reasonable level of autonomy.
- Stable cash flows and recurring revenue streams are a requisite.
- Long term growth prospect for the products or services being offered, thereby reducing the threat of obsolescence.
- Significant potential to further penetrate the markets being served with the strength behind consolidation.
Proper evaluation and implementation of this growth scenario requires several steps.
In depth assessment:
The initial ingredient required in determining the viability of a mini-niche consolidation is a detailed market and competitive assessment of segments and geographic area being considered as platform entities. Such an analysis also includes the strengths and weaknesses of the respective participants.
An objective interview within the markets served, including customers and competitors, is essential. If this step is omitted, it will likely come back to haunt any platform entity. Such questions may be:
- What end use market segments are the competitive companies currently serving?
- Who are the principal and potential customers within each market segment and what has been their recent experience with one or more of these competitors?
- How do current and potential customers rate the companies in terms of comparative product or service lives, quality, pricing, delivery and technology?
- How effective is each company’s marketing organization? How knowledgeable is their sales force? How responsive is the organization to inquiries?
- Do current and potential customers use multiple product and service sources?
- How does each company rank against its key competition?
Know the market
Following the thorough market and competitive analysis, it is necessary to characterize both the size and growth prospects of the market segment and prospective platform companies. The analysis should focus on the following:
- Size and at least a three-year growth outlook of the market segment
- Product and service requirements, features and specifications within each market segment.
- The major buying influences of each market segment
- Breadth of product and service lines required to be successful
- Competitive analysis within each market segment.
- Profitability and ownership structure of current competition
Initial interviews
The interview process of prospective niche companies is not easy. It requires a serious time commitment from an experienced source such as Irons Group Ltd. The interview may be done either in person or via the telephone. Personal interviews are preferred to establish the rapport necessary, although much-needed information can be gathered from select telephone interviews. At the conclusion of the interview, focus should turn to potential platform targets. This step is necessary in testing preliminary conclusions regarding possible long-term “partnering” relationships resulting from the interviews.
Identification and selection
Once the top prospects are identified and evaluated, it is important to again review all of the data gathered to gain a thorough understanding of the platform candidates. Such a review will identify the prospects that most effectively will result in a growth scenario.
It is possible that the platform company will be from within the group. When that occurs, it may likely result in a roll-up of selected members of the group.
It may also be necessary to turn to a private investment group to acquire members of the group and determine who will be the platform company. Such an entity must share the niche consolidation philosophy and have the financial resources to support its establishment and growth. Through the comprehensive assessment process, the investment group will be in a much better position to evaluate the mini-niche consolidation merits, which is good for both the investor and the platform companies. Those companies that consider involvement only after this comprehensive and systematic assessment of their specific market place and competition can capitalize on the opportunity.
If such a strategy appeals to you, please contact Keith Irons, Chairman, Irons Group Ltd.
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