Responsible Acquisitions yield growth: acquisitions immediately following a downturn generally yield strong returns, yet growing a business in a struggling economy is not only tricky, but could be damaging. Success depends upon an acquisition strategy that balances the need to grow with caution and responsibility.

• Author: DiPietro, Janice

For companies seeking to grow through acquisition, there's good news: The recession has created a strong buyer's market. Research has shown that acquisitions immediately following a downturn yield strong returns. On the other hand, growth in a sluggish economic era can be tricky, and aggressive pursuits can be dangerous, even disastrous. Companies that emerge stronger will have an acquisition strategy that balances the need to grow with caution and responsibility.

A first step is to evaluate the company's appetite and readiness. Before entering any transaction, first determine if there is the financial wherewithal by performing a thorough financial health check.

Since the recession, most organizations have shifted their focus away from profit and loss statements toward liquidity. Does the company have enough liquidity to carry off a transaction successfully? If not, consider the company's sources for funding growth before defining the acquisition strategy and the plan for recognizing value post-acquisition.

Sources of Funding

Funding can come from a variety of sources--internal liquidity, partnership, liquidity from debt or equity.

Internal Liquidity: One of the quickest and easiest ways to generate funding is by building internal liquidity. This involves a faster turnover of critical balance sheet items and improving processes like collections, inventory management and supplier settlement. The company could downsize to a smaller-scale version of the business or reshape it by outsourcing non-core functions.

In addition, it could shift from a fixed-cost structure to a variable one, particularly to help weather weak markets.

When considering options, first understand the customer base and what matters most to them. For example, Dell Corp. was able to cut prices and gain market share by dropping free after-sale customer support. Customers now have the option to pay for the level of support they desire and no more.

Partnerships: New opportunities may also exist to gain new alliance partners, to move into adjacent markets, to adopt new pricing models or to enter new channels. Some of these opportunities may be created by the failure of competitors or by a new customer appetite for solutions that show measurable return on investment or reduce the risk.

For existing key customers, relationships can be deepened by working together to improve each other's performance. For example, are there aspects of supply chain logistics that could be handled for the customer that reduce overall costs and improve profitability for both entities?

Liquidity from Debt: A third option is renegotiating debt. Talk to lenders...