As a growth strategy, mergers and acquisitions have become popular for companies looking to expand into new markets, gain a competitive edge, or acquire new technologies/skillsets.

M&As are especially popular in the professional services space with the growing wave of retiring Baby Boomers and a rapidly changing economy and marketplace.

So what is the impact of all these mergers? More importantly, does an M&A makes sense for your firm?

Strategic M&A: Seeking a solution to a business problem

There are essentially two kinds of mergers and acquisitions: strategic and financial.

A financial merger or acquisition is as the name implies, for financial reasons—often to pick up some quick cash or as an investment. But I’m not really in financial M&As for this particular discussion.

Strategic mergers and acquisitions offer a solution to a different business problem. Perhaps the acquirer is looking to grab a new product line, add some additional facilities, enter a new market, or gain expertise and intellectual property. For professional services firms, a strategic M&A is often about gaining credibility, adding intellectual firepower, or changing the balance of power in a particular market.

The bottom line is a strategic merger yield value for both the acquired and the acquiring firm. To reluctantly use a hackneyed phrase, it’s a “win-win” for both parties.

So what does a strategic merger look like? Here’s a good example:

A few years back we were researching firms that received unusually high valuations. One caught my attention. It was a smaller firm that specialized in top-secret work and had deep experience and contacts in one of the intelligence agencies. This firm was for an eye-popping 10-times revenue.

When we asked the acquiring firm why they were willing to pay such sums, their reasons were perfectly clear.

The target firm offered must-have qualifications and contracts with a must-have client. Not having these capabilities would put the acquiring firm at a significant disadvantage when competing for upcoming work. In short, they believed the long-term value for the acquiring firm was much greater than the inflated purchase price.

When the marketplace changes in response to external events or new laws and regulations, it can create a gap in a firm’s critical offerings. It is a prime opportunity for a strategic merger.

After 9/11, the national security and defense industry lacked the relevant skills to match rapidly changing federal requirements. Companies quickly realized they would be sidelined without the skills and experience necessary to meet the new security demand. The firms with the requisite experience and relevant client lists suddenly found themselves strategically valuable and highly sought-after acquisition targets.

Many industries are seeing an acute shortage of experienced professional staff. Cybersecurity, accounting, and engineering are just a few examples that immediately come to mind.

The reality is, intellectual property (IP) is the new currency of modern business. Once away and carefully guarded, IP is now actively bought and sold. For many companies, the acquisition of a firm and its IP is the quickest path to market dominance—or at least a roadblock to competitive incursions.

Many professional services firms are based on a billable-hours business model, but that is certainly not the only option. Some firms generate revenue as a fixed fee or through performance incentives. Others may employ subscription models (popular in the software industry).

Of course, the value of an effective M&A growth strategy is not just about how you are paid. A merger may also offer a new type of service, such as brokerage, insurance, or money management. If you’re considering a new business model. The easiest way to develop and test it out is to acquire a firm that’s already using the model successfully. That way you avoid possible missteps from inexperience.

Much like adding a new business model. A strategic M&A may help you save considerable time and expense in your growth strategy.

Let’s say you’re considering a new service for your business. Your firm is fully capable of developing and delivering that growth service on its own, but it will take more time, money, and resources than you’re willing to devote. It might be easier and more cost-effective to simply acquire the capability.

Not only is this a practical and smart shortcut to the sought-after service and expertise. But you also acquire a built-in customer base and target audience.