Mergers and acquisitions. What does that mean to you? Do you picture big city investment bankers and corporate raiders, Fortune 500 companies, hostile negotiations, confusing securities laws? People often see M&A this way. As a result, smaller businesses are often unsure about how to proceed with the purchase or sale of a business, and who can help them through the process.
You might think of M&A as a “big company” issue, but it’s something small companies need to prepare for, too. Tremendous opportunities exist for purchase thanks to the impending retirement of the Baby Boomers, and a recovering economy creates possibilities for industry consolidation and business acquisition. If you are a small business owner, you need to be educated on mergers and acquisitions, even if buying, selling, or merging isn’t on your immediate radar.
Here are just a few small business M&A basics.
- Start with proper perspective.
Whether you are acquiring, selling, or merging small businesses, proper perspective, in the form of a professional business valuation, is imperative. Owners looking to sell often overvalue their companies, remembering the years of “sweat equity” they poured into their companies (which doesn’t count now) and how emotionally important their company is to them. This is actually why many M&A deals go unfinished. Engage the help of a qualified professional in valuating the business before beginning any M&A activity.
- Ask the right questions.
Buyers and sellers have specific needs that must be addressed. By no means an exhaustive list, here are a few first questions to ask:For Buyers:
- How much of the projected revenue can be translated into cash flow after taxes, depreciation, amortization, etc.?
- How likely is it that revenue will remain stable in the current economy?
- How sensitive is the business to economic changes?
- Is the competitive landscape changing?
- Are revenues dependent on a select few clients? If those clients leave, can the business survive?
- Will staff and customers remain? Do contracts need to be renegotiated?
- Will the seller finance?
- Will the acquisition be treated as a stock or asset purchase?
- What is my company really worth? Again, this is where a business valuation is important.
- What obligations will fall to the new owner?
- Has my earn-out been clearly stated and acknowledged by all parties?
- Has the sale been structured to minimize risk and taxes?
- Is there a proper contingency plan in place if my company loses revenue during the buyout period?
For those considering a merger:
- Will the two businesses produce more income together than apart?
- Does either business have assets that can be sold to allow for more profit?
- Do company cultures match? Will employees “mesh” after the merger? What can I do to build the relationship between the two firms now so that we all survive the merger?
- Call in support.
No matter what M&A scenario you choose, professional advice is key. The mergers and acquisitions process is complex and risky. Attorneys, accountants, bankers, and your business advisors are your best friends during the M&A process. Secure them early and consult with them often during the process. And if any one of them is an untrusted source of support for you, replace it. If any one of them is inexperienced in the process, replace it. Our team has decades of combined experience in mergers and acquisitions across a variety of industries. Make sure yours does, too.
I could write for days about the M&A process and its intricacies. Instead, we invite you to attend our next seminar, which is dedicated to M&A, on Tuesday, August 22nd at 5:30 p.m. Our own Adam Boatsman will moderate, and our distinguished panel will include attorney Phil Chubb, Managing Director of ICG Capital Scott Upton, and owner of Lindy’s Italian Ice and BGW client Paul Givens, who is experienced in mergers and acquisitions. This will be a night filled with valuable, personal insight. We hope you’ll attend.
Remember, mergers and acquisitions affect the small business owner, too. Prepare yourself in order to maximize your financial and personal objectives.