Mergers and acquisitions. They aren’t just for Fortune 500 companies and big-time investment bankers.
Small and medium-sized businesses can also undergo and benefit from mergers and acquisitions. Often, business owners don’t know how to proceed with the purchase or sale of a company and don’t know who to turn to for help.
Like buying and selling real estate, merging with another company or acquiring their assets often requires the help of M&A professionals working on the business owner’s behalf to get them the best deal. Accountants, attorneys, bankers, and business growth consultants are a business owner’s M&A dream team.
Below, we’ll guide business owners through a brief M&A tutorial.
Mergers & Acquisitions 101
Mergers
In a merger, two companies combine to form a new one. Mergers are classified in a couple of different ways:
Statutory–The target (company being bought) fully integrates into the acquirer and no longer exists. So, Company A buys Company B. They exist under one name, ‘Company A.’
Consolidation–Two companies join to become a new one.
Subsidiary–The acquirer now manages the target company.
Mergers are also classified according to the type of businesses that conjoin.
Horizontal–A business buys a competitor or related company. The acquirer might do this to achieve greater economies of scale, teamwork, and market share. One well-known example is when Chrysler and FIAT merged.
Vertical–One company merges with another within its production or distribution chain. A company might do this for the cost benefits of controlling part of its chain. One example is a coffee bean farmer purchasing a coffee distributor (forward integration) or vice versa (backward integration).
Conglomerate–A company joins with another outside its usual scope of core operations. General Electric purchasing aviation, finance, and entertainment companies is an excellent and well-known example.
Acquisition
In an acquisition, one company buys the other outright. The acquiring company may approach the target company to purchase it in a friendly takeover. Sometimes, the target company doesn’t want to sell. Then, the acquirer can pursue the target in a hostile takeover.
The terms have different meanings, but ‘mergers and acquisitions’ are generally used interchangeably.
Ripe Conditions
Business owners hoping to purchase or sell can look for the following conditions and situations that make M&As highly desirable:
- The company requires an expert to grow.
- The growing company needs additional capital.
- The owner cannot, or isn’t willing, to invest to keep up with market changes.
- The competition reached out, asking the business to sell.
- The industry is experiencing many consolidations.
- The business owner is ready to wash their hands of the business.
- The business leader wants to step down as leader but has no successors.
- Family successors will need capital and/or expertise to sustain the business.
Hallmarks of Successful M&As
What primes a business for merger and acquisition success? Five attributes can make M&As happen more smoothly.
1. Healthy Finances
Mergers and acquisitions are significant financial investments with ups, downs, delays, and unpredictable costs. Businesses must also invest in research, legal fees, and integration expenses. A company can better withstand M&A processes if it has low debt, a healthy balance sheet, and steady cash flow.
2. A Knowledgeable Team
A team with strong leaders, a clear vision, and the ability to execute ideas can identify a good deal, compromise on favorable terms, and guide a company through the M&A process.
3. Strong Framework
A business must be able to support more extensive operations. From logistics to human resources and technology, a company will fare better during M&As when they can quickly scale up, reaping the anticipated rewards faster.
4. Logical Terms
Agreements should align with the company’s long-term goals. What makes sense today should continue providing value into the future.
5. Good Market Conditions
Economic stability, competitors, and industry trends factor into its M&A success, resulting in better terms, easier transitions, and swift progress.
Prepping for a Merger or Acquisition
Business Valuation
Owners should start with professional business valuations, whether small, medium, or large, acquiring, merging, or selling.
Sellers often overvalue their companies, counting the sweat equity poured into them and the emotional attachment they have. Many M&A deals go nowhere because of valuation disagreements. A qualified valuation professional can help any business begin M&A activity.
Preparing Good Questions
Knowing the right questions to ask can prevent frustrations or stalled negotiations.
Buyers want to know things like:
- Is the competitive landscape evolving?
- Does revenue depend on a select few clients? Can the business survive if those clients leave?
- Is it likely revenue will remain stable in the current economy?
- How sensitive is the company to economic fluctuations?
- What amount of projected revenue is expected to translate into cash flow after taxes, depreciation, amortization, etc.?
- Will staff and clients remain? Do we need to renegotiate contracts?
- Who finances what?
- What’s the payment method–cash, stocks, or asset purchase?
Sellers want to understand:
- What’s my company worth?
- What are the new owner’s responsibilities?
- Is my earn-out clearly stated, and do all parties understand and agree to it?
- How can I minimize risk and taxes?
- Should my company lose revenue during the buyout period, is there a contingency plan?
Merging companies want to consider:
- Will the two companies profit more together than apart?
- Can either company sell off assets for more profit?
- How well do company cultures match? Will employees get along after the merger? How can I help strengthen relationships now so that merging is easy?
Forming the Support Team
Mergers and acquisitions aren’t a ‘big company’ issue. Small and medium-sized firms must prepare for them, too. Retiring baby boomers and an ever-evolving economy create possibilities for industry consolidations and business acquisitions at every turn.
Professional advisors are essential in a business’s unique M&A scenario. Merger and acquisition processes are complex and risky. Business owners thinking of mergers and acquisitions down the road should form a team of accountants, attorneys, bankers, and business growth advisors with M&A experience to help them prepare. Preparation is the best ingredient for a successful M&A transaction.
