The primary goal of most acquisitions is to achieve a significant return on investment quickly. Many levers are available to management, but perhaps the most impactful action—both in terms of profitability improvement and generating positive momentum—is to focus immediately on supplier negotiations.
By developing a strategic plan for supplier negotiations, new owners can lower costs quickly, improve terms, and sustain wins for the long term. Experience suggests such negotiations reduce costs by as much as 10 to 20 percent, which translates to increased EBITDA and, often, the expansion of valuation multiples.
Although cost reduction through supplier negotiations is likely a familiar concept, in practice new owners should consider some critical requirements and results associated with a well-run process.
1. Speed and immediacy matter. In the first few months following an acquisition, new owners have an unprecedented opportunity to negotiate with suppliers. At this stage, suppliers are most anxious about the certainty of future business, so they will want to secure their relationship. As a result, they are more willing to make concessions during this period.
2. The incumbent team needs guidance. Although incumbent buyers are likely capable of negotiating, their tenure often proves limiting. Most buyers will negotiate as they have historically, yielding similar outcomes. Expecting them to overhaul their approach is unrealistic and risky. Under new ownership, the company has one shot to set the tone with suppliers.
3. A process-focused approach is essential. As with most business functions, a clearly defined process yields the best results. In most cases, the prior process is either absent or insufficient, which will limit results. Applying best practices that have proven effective in similar change-of-ownership scenarios can maximize the probability of a successful outcome.
4. Early wins create momentum. In addition to the financial benefits borne from reduced costs, the quantifiable savings create a rallying point for the entire company. Such an early win is critical for establishing momentum, as it sets the bar for similar improvement within other functions, such as sales and marketing, operations and finance.
Applying best practices that have proven effective in similar change-of-ownership scenarios can maximize the probability of a successful outcome.
The above points notwithstanding, experience offers a few suggestions for new owners. First, and unsurprisingly, they should focus on the categories with the greatest spending. Naturally, the industry will drive category prioritization. For example, retailers spend heavily on merchandise, whereas manufacturers often concentrate on raw materials.
Second, management should take stock of how negotiations are currently conducted and whether buyers have the skills to achieve optimal results. Unless management works day-to-day with the buying team, evaluating individual capabilities and reallocating responsibilities will prove challenging.
In the end, developing a strategic negotiation plan, employing the right frameworks, processes and tools, and ensuring the buying team has the right level of skill and coaching, the new acquisition presents an outstanding opportunity to achieve a faster ROI.
Case Study: Food Manufacturer Acquisition
As a case in point, a private equity firm recently purchased a food manufacturer and planned to grow the business’s scale from regional to national. The day after the acquisition, it began evaluating the company’s multimillion-dollar ingredient spending and its negotiation practices.
Recognizing the opportunity to drive savings and build momentum quickly, the PE firm introduced a new negotiation process and tools for the team, while also coaching buyers. As a result, the company saved 5 to 10 percent on leading ingredient categories within the first three months. Further, it surfaced new leadership from the buyer team and established a roadmap for the full buyer team to drive continuous improvement across the supplier base.