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How to ‘marry’ a new company: Follow four steps for a successful merger or acquisition

By Jim Molis   

Buying a company is like finding a spouse. You must know what you’re looking for, recognizemergers when you’ve found it, and commit to making it work.

Mergers and acquisitions can be good ways to grow your business, but you must be proactive in your approach and deliberate in your execution. “Nothing is a good deal if you don’t need it,” said Don Wiggins, president of local investment banking firm Heritage Capital Group. “It’s what you need. It’s what fits.”

Growing by merger or acquisition should not be done hastily. It requires diligently following four steps:

• Define your strategy,

• Make the approach,

• Negotiate the deal, and

• Execute the plan.

Define your strategy

Start by determining your reasons for expanding. Are you trying to grow geographically? Or gain more local market share? Remove competition? Add new services?

Companies often consider mergers and acquisitions if growth plateaus, said Joe Palermo, a partner in B2B CFO. You can continue to grow organically but you will pick up market share faster by buying a competitor, he said.

Identify the criteria for the company you want to pursue, including its annual revenue, number of employees, and market share, suggested Palermo. Consider your top three competitors based upon your knowledge of your industry, their performances, your previous dealings with them, and their reputation. Buying or merging with a competitor typically brings synergies such as the ability to consolidate operations, streamline management, improve purchasing power and leverage relationships.

It also may be easier to acquire a competitor’s customers by buying the company than trying to lure them individually, particularly if they are loyal to the other business, said Cal Heseman, a business broker with Transworld Business Brokers.

You may have to review several companies to find one that will work for you, Wiggins said. Be methodical in your process, and proactive rather than reactive.

“You want to make sure you’re prepared to go to market on your terms, not someone else’s,” Wiggins added.

Make the approach

Once you have honed in on some target companies, reach out to them discreetly. You can use an intermediary like Wiggins or Heseman, who protect your identity early in the process. Or, you can approach them informally.

Palermo often invites a potential seller to lunch or dinner. Business owners who are proud of their companies often enjoy discussing common trends and issues over a meal. During the meal, Palermo may ask, “In a perfect world how do you see your company moving forward?”

The question often prompts the business owner to consider scenarios he or she may not have otherwise. “A lot of people who own companies don’t think about doing anything until they’re approached,” Palermo said. “Everyone is so busy running their company they don’t plan ahead for this.”

Palermo lets the conversation flow naturally, without pushing. He lets business owners identify opportunities such as joint ventures on their own.

Depending upon the business owner’s age, Palermo also may ask about retirement plans. Specifically, he will ask what the owner intends to do with the company, the tax ramifications of the plan, and how the owner would invest any proceeds if the business were sold.

His goal in asking these questions is to get the business owner thinking of selling so that the possibility could be explored further in additional meetings.

Negotiate the deal

Once you have an interested seller, start drafting the parameters of a deal. A merger would combine the two companies into one, while an acquisition would be a purchase of one business by the other.

“A lot of companies out there are on the ropes,” Heseman said. “If their numbers are still the same as they were a few years ago, you can pick them up a little cheaper.” Seller financing often is available as well, he said. “Just because the banks aren’t financing doesn’t mean we aren’t going to get a deal done.”

Heseman cited a recent deal in which the buyer paid 50% of the purchase price in cash. The seller financed 10%, and the remaining 40% will be earned out as a certain percentage of revenue over 24 months. “We have to be a little more creative in how we get deals done, but they’re getting done,” Heseman said.

If you buy a company, consider whether you will purchase just the assets or if you will buy the stock, which would also transfer liabilities, Palermo said. Review the company’s financials closely, particularly the number of customers and how much they generate. “If the revenue’s not there, no matter what you do you’re going to have a problem,” he said.

In addition to ensuring all of the numbers are accurate, Palermo asks business owners if they run any personal expenses through the company. If they do, there could be additional savings by eliminating those expenses through the deal. He also will ask for financial projections.

Due diligence is taking longer than in the past because buyers don’t want to make mistakes, Wiggins said. He recommends reviewing a company’s operations, financials, legal compliance, and (if applicable) technology.

Envision how you will combine the companies, and what the resulting business will look like, Palermo said.

Execute your plan

Know where your synergies and savings will come from before completing the deal, Palermo said. Possible synergies including getting better pricing on benefits, services, or materials through increased purchasing power. You also may increase sales. “You have to be careful cutting the marketing and sales people because they have those relationships,” said Palermo.

You can often save money by consolidating your back office operations, combining facilities and trimming payroll. Identify the savings in advance and reap them according to your plan.

If you plan to combine accounting operations in 45 days but take longer, then you push the savings out further, affecting other parts of your plan, Palermo said. “If you say you want to implement these types of changes you have to stay on the game plan.”

Watch your numbers carefully as you move the combined company ahead, Heseman emphasized. “The person who buys a business and learns to focus on revenue growth while closely managing expenses is going to be well positioned when the economy improves.”

Jim Molis is a contributing editor to Advantage: The Resource for Small Business. He can be contacted at jim@creatwoodpr.com.

SIDEBAR

Acquisitions from a buyer’s point of view

Venture capitalists and the companies they support often begin with the end in mind.

Investors favor companies that could eventually be sold, thereby generating returns commensurate with a high-risk investment, said Al Rossiter, president of Springboard Capital Management, an equity investment fund specializing in early-stage venture investments.

As they consider each investment opportunity, Rossiter and fellow investors evaluate a company’s potential appeal to financial or strategic buyers. Financial buyers acquire companies for cash flow or other strong fundamentals, without intending to operate the business. Strategic buyers acquire and operate companies that align with their plans for growth.

Rossiter looks for companies with a “sustaining competitive advantage” that would appeal to strategic buyers. Examples would include a proprietary technology or geographic market share that would be more difficult or expensive for an acquiring company to develop independently. “There needs to be something of distinct value there,” Rossiter said.

If a company ultimately seeks to be acquired, you can position your company for a potential sale to a strategic buyer from the start. “You have to understand what the value of your company represents to the potential acquirer,” Rossiter said. For example, if you produce medical equipment that a larger company may eventually want to manufacture at its own facilities then don’t build your own plants. The acquirer would not pay for your facilities, only the core technology.

“Understanding the strategic benefit that it brings to an acquirer allows you to develop the business plan that enhances that strategic value without adding baggage,” Rossiter said. “You’re developing the company to expand or enhance those attributes that the acquirer would desire.”

If you plan to sell to a competitor, get attention by building a strong customer base. “Generally you need some sense of scale, some operating track record to even become noticed within a market,” Rossiter said. Having a full understanding of the desired outcome is key to the business-planning process.


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