Small Business Expert
Your resource for informative videos, articles, and tools to save you time running a successful small business.
Small Business Documents & Forms
Starting or already running a small business? We have fully customizable business forms and legal documents that will help keep you organized and well-documented. Available for immediate download after purchase.
Visit The Form Center
Setting the Course for Happily Ever After: Growth Through Mergers and Acquisitions Requires Careful Review and Cooperation
A merger or acquisition can expedite the growth of your small business. However, a minefield of variables can determine success or failure, so it's imperative to be cautious with each step in the process.
Whenever you consider expanding into a complementary horizontal or vertical service, you should view it as a "build versus buy" decision, says John Long, managing director of Table Rock Ventures.
"You buy if it's too hard to hire or build the expertise -- and/or if it would take too long to build the capabilities to scale," says Long, who runs a growth strategy and M&A advisory consultancy. "You build if there aren't any barriers to entry and it's easy to hire the right people and to buy the right technology. In the end, it's a cost trade-off."
According to Luke Braun, CPA, of Rea Strategic Solutions, an ideal time for M&A activity is when the market is down -- the "buy low, sell high" approach -- or when the buyer is poised to handle significant growth. However, Braun suggests discussing the possibility with a reputable deal maker, trusted advisers, your accountant, and your attorney before making any moves.
If the consensus is favorable, your first step is to clarify what you want in a target company and then create a "hit list" of possible targets. Next, hire a deal maker or do independent research to find businesses that look promising. Exit strategist and business consultant Harvey Zemmel says this step can involve tracking your industry's trade press, speaking to vendors, attending trade shows, and networking with peers and competitors in your industry.
Braun also suggests asking these questions of each prospect:
- What are the company's key profit drivers?
- Who in the company is important to the success of the organization?
- Is the culture a fit for my business?
- Is it the right time in the market to do a deal?
To further separate the wheat from the chaff, take a close look at:
--Customers: Does the company give you access to previously untapped markets? Also, pay attention to customer concentration. "A company with $10 million in sales with $6 million coming from two customers is a very risky proposition," says Long. "What happens if you buy the company and then lose those two customers?"
--Product/service: Does it complement what your company offers? Is it a "better together" story? Or, as Zemmel summarizes it: "You should be looking for companies that demonstrate strength in areas where your company is weak."
Once a target company is engaged -- but before any contracts are signed -- the due diligence commences. Depending on the size of the deal and how quickly the target responses to requests for information, this process can take from a few days to several weeks. Because most small business owners are busy enough running their daily operations, they might want to invest in a consultant to guide them through the process.
Long says that advisers can be paid a retainer for their services plus a success fee (a fixed percentage of the deal), or they can be hired for an hourly or daily rate. However, most advisers who deal with large transactions will require a percentage of the deal as a fee -- typically between 1 percent and 5 percent.
Zemmel says the due diligence phase examines the legal, financial and commercial aspects of the target company. The legal review looks at items such as existing contractual agreements, intellectual property, and ownership structure. During the financial review, a thorough understanding of the company's books is critical. Long suggests looking at trailing 12-month trends, not just how the company fared in the past year.
"We had a deal fall apart in due diligence because even though the company had three years of steady growth, its last six months were trending down and resulting in an unprofitable business if it continued another six," he says.
Adds John Reddish, president of Advent Management International: "If you or your accountant [are] not good ferrets, use an acquisition consultant to sniff out discrepancies. If you find some, recast the numbers to reflect any changes in value. If the owner balks at adjusting the price or won't negotiate, walk."
The commercial phase entails a review of internal processes, management, strategy, competition, and company culture. Long says a cultural mismatch is a common reason that mergers fail, no matter how solid they looked on paper. He says a great way to test a cultural fit is to work together on a project prior to closing a deal.
Braun also points out that both parties have to be willing to look at the deal from the other company's perspective. If everyone believes they have been treated fairly, the chances for a bright future together increase.
Long agrees. "If one of the parties is not happy with the final terms, you run the risk of this party not performing afterwards," he says. "It is better to leave something on the table in a negotiation so that the other party is really happy with the deal."
