Navigating the Maze
No one said mergers and acquisitions (M&A) are easy, but there are some key strategies every business owner can consider when the time is right. Since 2004, my firm has grown from zero to US$8+ million through eight acquisitions and three mergers. In that time, we’ve analyzed more than 80 deals, learning how to simplify the M&A process along the way. From finding a deal to closing a deal, there’s a lot to consider. It’s even more difficult when it’s your business on the line. Here are a few ways you can navigate the M&A maze with confidence:
Find the Best Deal
Whether you’re seeking to acquire or merge, landing the best deal starts with finding the best seller. A great way to do this is through referrals and word of mouth. Inform your banker, attorney and the entire business community of your interest in a deal, and have them spread the word. With that in mind, work on widening your pool of prospective sellers to find the ideal candidate (and price). We advise our clients to contact their competitors about an M&A opportunity. You’ll be amazed at how many of them might be interested in the opportunity, and how many doors open up from doing so.
Examine the Culture
Culture plays a bigger role in business transactions than people might think. Whether you’re merging or acquiring, you want your business in the hands of the right people. While it shouldn’t be the deciding factor in the M&A process, your personal feelings toward the new business owner and staff are definitely something to keep in mind. I believe this to be the most important aspect of an M&A deal. To get the most out of the process, it’s important to ensure that you share similar beliefs regarding accountability, culture, vision and management style.
Perform Due Diligence
To make the due diligence process less stressful, I encourage clients to send a complete list of all required information at one time, which avoids the hectic exchange of information in bits and pieces. And I always encourage clients to ask specific questions about the company, instead of focusing only on the financials. By digging deep about vendor relationships, staff retention, equipment age, etc., they’re kept from being surprised later in the process. The more you know in the beginning, the better deal you’ll get in the end.
Structure Your Deal
For a merger or acquisition to be successful, both parties need to be comfortable with their end of the deal. I worked with a roofing company on a US$3-million sale a few years ago. The way the original deal was structured, it would have cost the roofing company nearly US$1 million in taxes. We were able to eliminate about US$600,000 of that tax through the transactional structure. As a result, the buyer was able to write off the value over a longer period of time, and our client received capital gains instead of ordinary income, which made a significant difference. It was a win-win for both parties. If you feel you have a win-lose situation on your hands, be prepared to negotiate, wait, negotiate some more, and then wait some more.
Assess the Value of the Business
Buying a business is much riskier than selling a business because future financial success is never guaranteed. If you’re the buyer, make sure the business you want to invest in is worthwhile. Never assume a growing business is a successful business. I once had a client that grew from US$2 million to US$15 million in five years … but their growth wasn’t profitable. When we went to value the company, the owner realized the financial slide, so he added investors to accelerate growth. From my experience, you cannot easily value a business when determining what it could sell for and what the market would bear. By being open to the “big picture,” however, you can be better prepared.
