The Essential Guide To Successful Mergers And Acquisitions

The Essential Guide

To Successful Mergers And Acquisitions

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Success in business has always been about more than just revenue and bottom lines. These are undoubtedly important measures, but alone, they mean little to your company’s future prosperity. To investors, growth is typically the most important indicator. Mergers and acquisitions are two of the quickest ways that businesses grow – and at the most rapid pace.

From a company’s perspective, M&A deals can be a source of greater long-term profitability.

When done right, acquiring or merging with another business offers the chance to combine skills, products and services – and, ultimately, better serve a combined clientele. Your firm has every opportunity to grow revenue and profitability as well as open up new doors.

But, regardless of the great potential of mergers and acquisitions, the wrong deal could be crippling. As a buyer or seller, such dramatic change is an emotional transaction. For many small business owners, selling a business is like seeing your child go out into the world – you no longer have the control you used to. Buying a business is equally emotional. And blending new people and personalities into one culture is as much an art form as it is a science.

These large-scale business transactions comprise more than just the numbers. Sensitivity to these sentiments is often the difference between a good deal and a bad one. Given the importance of getting it right, use this guide to help choose the best deals and make them a success.

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Due Diligence: The Single Most Important Part Of The M&A Process Whether you’re an investor looking to make a dollar or a budding firm seeking the right opportunity to grow on a grand scale, information is your greatest asset. The initial success of any merger or acquisition hinges on knowing as much as possible about the company you wish to acquire.

Some of the most important pieces of information you need to uncover include: n Company Cash Flow Does the true cash flow of the company you intend to acquire match up with their financials and tax returns? If the business is not able to prove its inflow of cash, this may signal a problem.

n The Owner’s Compensation Upon purchase, the owner of the company you’ve acquired is no longer in the picture. His or her current salary and benefits – a company car, vacations, health insurance – are not a business expense anymore. Removing these expenses from your analysis gives you a clearer outlook on the true value of that company to your business. n Accounts Receivable Look into the accounts receivable area and its turnover. Are accounts paid in 30 days or 90 days? How does it compare to industry norms? If accounts receivable have a lengthy turnover period, you’re going to need more working capital to operate.

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n Employee Benefits How do your company’s benefits compare to those of the firm you’re acquiring or merging with? From health, dental and other insurances to 401k plans, salaries and days off, there is a cost to giving all of your employees equal requisite compensation. n Duplication Of Efforts If you map out your staff and the responsibilities of your company post-transaction, you might find a duplication of roles. Are there two people with the same position? Do they have different abilities? Could one benefit the company in another role? n Monthly Revenue It’s important to understand the potential seasonality of a business you’re acquiring. Given employee workload, it’s beneficial to acquire a company that evens out the flow of your business and revenue. n Software If a company uses the same software as yours, merging data and training is particularly simplified. If they use different systems, however, you must determine when to combine your data and how to integrate the two databases. n Equipment In industries such as manufacturing and distribution, the state of a company’s equipment is extremely important. How old is the equipment, and does it need to be replaced? While this might not affect the initial purchase price, it does impact the amount of cash you need to expend in the first few years following a merger or acquisition.

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Determining Fair Market Value The fair market value of a business isn’t necessarily what you value another company to be worth to your operation. In reality, it’s likely that the market doesn’t know all of the relevant information about a company (hence the importance of due diligence).

The true market value may be an unknown. A buyer might know what they’re going to do with the acquired company, and a seller may have information that isn’t public knowledge. The real question is: What actually changes hands between a willing buyer and seller?

The following are fundamental tips and facts for assessing the value of a company: n Look At Three To Five Years Of Data Your goal is to get a feel for the company you’re interested in doing business with. You want to look at the big picture to see how the company is faring in a general sense. But, given the Great Recession, looking back at five years worth of data might skew the true profitability of a business.

In this case, consider looking at data prior to 2008 and survey the trends from then until now. It’s possible that the economic downturn has hurt the company as much as anything else. n Bigger Is Not Always Better A large company isn’t necessarily a profitable one. Ensure that the work it’s been doing is turning into real profit. If a company can’t produce the cash, it’s not worth the risk. n Recurring Revenue Companies that continuously sell the same products or services (software, for example) are more reliable and potentially more valuable. These services don’t always require the cost of new sales to generate additional revenue.

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n Customer Diversity If a company is heavily reliant on a small customer base or one large client, the value of such a firm is typically lower due to the increased risk. If a single client is 20-40 percent of a company’s revenue stream, losing that business would be a catastrophic hit. n Essential Employees If you’re selling a business, having key employees that are running your company increases its value. These integral team members are part of what your buyer is purchasing. Without them, a buyer must find competent employees to operate with maximum profitability. With them, your buyer doesn’t carry the risk of finding new people. n Market Demand And The Economy Is there a lot of M&A activity in the marketplace? In the years following the recession of 2008, businesses didn’t want to take on the risk of acquisition. It was also extremely difficult for buyers to coordinate bank loans and financing, as lending became extremely tight despite historically low interest rates. Since 2012, however, there has been a significant amount of loans and financing options for buyers. n Growth Potential As mentioned, growth is a key factor in mergers and acquisitions. If you operate in a largegrowth industry, the value of your firm is generally higher because other companies see the potential for increasing revenue and profit. In turn, businesses are willing to pay more.

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n Barriers To Entry An equally valuable characteristic is the level of difficulty to start a business in your industry.

Some industries are in a line of work that is easier to duplicate than others. For example, aircraft manufacturing requires incredibly expensive equipment – so much so that the likelihood of new businesses trying to carve out a piece the industry’s revenue is very small.

How To Finance A Merger Or Acquisition Whether you’re in the position to buy or sell, it’s important to know what options businesses have to finance mergers and acquisitions. M&A consulting services often include assistance to both buyers and sellers in the financing component of M&A transactions. Both parties involved in a deal benefit from the most suitable financing. A buyer’s options include: n Owner Financing This is an agreement between the buyer and the selling owner on a guaranteed price to be paid out over time, with interest. Common owner financing terms are five- to seven-year payouts with an interest rate of six to nine percent. This might also include a down payment. This option entails some seller risk, as it involves a stake in the purchasing company in the form of debt. n Earnout Earnouts are agreements to which a certain amount of payment is guaranteed while the rest is contingent on the success of the deal. The payment terms are based on the post-transaction performance of the company.

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n Small Business Administration Usually financed through bigger banks, companies acquire 10-year notes that typically necessitate 10-25 percent down, depending on the company and the profitability of the deal. Banks look into both the buyer and seller, which affects both parties in different ways.

It’s a less expensive form of financing than owner financing, as current rates sit between 4.5 percent and 6.5 percent. It’s also typically capped at $5 million of debt.

There are plenty of components that go into a merger or acquisition – aspects of both companies and external stakeholders. While numbers and data are certainly a piece to the puzzle, there are many other important factors that determine the success of a deal.

Whether you engage an M&A consultant or choose to go at it individually, ensure that you consider the information outlined here. It’s the difference between achieving future success and growth or looking back one day and wishing you made the right deal.

Need assistance with financing a merger or acquisition, or seeking general M&A consulting support? For accounting experts that stay ahead of the curve, contact LBA Haynes Strand.

Schedule A No-Cost Consultation

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