Prior to writing an acquisition plan, the Owner or Board of Directors should write and approve an acquisition statement (AdMed can assist with this).
The purpose of the acquisition statement is to put into words the rationales for doing the acquisition(s). There are many different reasons to consider an acquisition but, in the end, it is best to have only one.
So, what could that one reason be? Here's a list of rationales, all of which are designed to help your company grow.
Top Line Growth: The number one reason for acquisition! It is responding to a need to expand in a declining market, reverse slippage in market share, capture economies of scale all with the goal of gaining a market leadership position.
Follow Customers: Attaining competitive product breadth or expanding into your existing client's markets.
Leverage Technologies: This allows you to initiate product innovations and diversification, as well as add technologies you are lacking in order to compete or gain competitive advantage.
Consolidation: This reduces redundant expenses and increases purchasing power.
Stabilize Financials: You may want to leverage your balance sheet or incorporate a higher margin business.
Expand Your Customer Base: You could acquire a company to expand into new locations or simply buy a customer portfolio.
Expand Talent: Add seasoned executives to a hot-but-inexperienced management team.
Defensive Positioning: Fend off competition or position yourself for the future.
Having a single, clear reason for an acquisition keeps you focused on which markets to look at and which companies to consider. Growing through acquisition allows you to fulfill a need for your company. Even if your company has multiple needs, the acquisition process should be about filling one need at a time with the best company for that particular need. Trying to have one company fill multiple needs could make it so that it doesn't fill any of them particularly well. If you do not understand your needs, and you end up acquiring a company that doesn't fit, you may end up trying to shoehorn them into a disadvantageous role.
Acquiring a company for one of these reasons will help you fulfill that one specific need that your target company should be perfect for.
What is an M&A Consultant, and Why Use One?
Everyone has heard of Brokers – Stock Brokers, Mortgage Brokers, Marriage Brokers and, of course a Business Broker? But little is known and less understood about the Mergers and Acquisitions (M&A) consultant. Simply put, an M&A consultant is one who assists an individual (or company) in buying a business or helping a company sell or merge their business – in concept not too different from a residential Real Estate Agent in the housing market. However, that is about the end of the similarity.
A FEW STATISTICS
There are about 25 million businesses in the United States. The vast majority have no employees – Real Estate salespeople, consultants, nannies, etc. Discounting these, there are about 5.6 million of which 20% are for sale at any one time (even if they aren't publicly advertising it). Ninety percent of these are offered "for sale by owner" (FSBO's). Notwithstanding, over 50% of the businesses that sell are sold through brokers or M&A consultants, according to the U. S. Department of Labor and the SBA.
BUILD vs. BUY
Every year, thousands of people consider entrepreneurship. The two routes are either to buy an existing business or start one from scratch. Each course has advantages and disadvantages that one should consider.
Starting your own business can be very rewarding but needs to have a unique product, technology, or service. Let's face it; there are very few "new ideas" out there that have not already been tried. One would need to complete a thorough evaluation of the marketplace, competition, need – in other words a Business Plan. If you start your own business, you will not be paying for Goodwill or Blue Sky. Perhaps you can start from your home with no employees and greatly reduce the initial capital requirement.
However, you will need to support yourself (and family) from personal savings. There may be months or years before profits are sufficient to provide the level of income needed. Obtaining financing may be very difficult as there is no track record and no customers. The chances of survival of a start-up business is low – an 82% failure rate according to the Bureau of Labor Statistics.
Buying an existing business may be a more efficient way to business ownership, but it is frequently more costly (Just like starting a business, buying a business starts with a plan. An "acquisition plan"). Existing business owners will expect a premium for providing you with an existing customer base and location. However, the advantages of buying an existing business generally outweigh the disadvantages. Existing businesses can normally obtain financing from financial institutions because they have established history, assets, and a proven idea. The seller might even provide a portion of the financing in the form of a loan.
Established businesses are less risky because they have an existing customer base, relationships with suppliers, an operating process, a known location, and employees that are hired and trained. In addition, there is an existing cash flow which can provide immediate income to the buyer. Experts generally agree, in most cases, that paying the extra cost for an existing business will outweigh the risks of starting one from scratch.
SELLING YOUR BUSINESS
Whereas in residential Real Estate, you want everyone to know your home is for sale to accomplish the greatest exposure, rarely does an owner want everyone to know his business is for sale. Realtors deal in number of bedrooms and baths, square footage and schools. M&A consultants deal in Revenue, Cost of Goods Sold, expenses, Inventory and overall business valuations, recasting, Income Tax returns, Profit and Loss Statements, leases, etc. A business sale must be conducted in the strictest confidence to protect the ongoing viability of the business. If word gets out that a business is for sale, employees flee, competitors pounce, suppliers fret and the entire future of the business can be in jeopardy. How many "Business For Sale" signs have you ever seen? Additionally, businesses are typically valued on the basis of their cash flow and thus the value of the business may decline as the attention of the owner is focused on the sale.
In residential sales, the house and the land serve as the collateral that allows the buyer to obtain traditional financing. In a business, much of the value is in the intangible goodwill. Banks are left with very little to foreclose upon should the business fail under a new owner. For that reason, owner financing is a major issue in business sale transactions. The seller, therefore, has a tremendous stake in knowing the buyer – not just in the buyer's ability to operate the business, but his reputation and personal financial condition. Too often, an owner will find that he has been misled by a buyer who subsequently ruins the business and jeopardizes the ultimate repayment of the loan.
THE SOLUTION
In to many cases, an owner will pursue a FSBO route to a sale of his business in an effort to avoid paying a commission to an M&A consultant. The short term reality of the payment of a commission is overshadowed by the benefits of having a seasoned veteran of business sales working with him. Using an M&A consultant can actually increase the cash that remains in a seller's pocket following the sale. A good consultant will work in the best interest of both buyer and seller throughout the transaction, understands the many pitfalls inherent in business transactions, maintains confidentiality throughout the process, qualifies buyers for reputation and financial capability, assists in structuring the various financial options available, and allows for the owner to do what he does best – run his business.
Considering the pros and cons, the stakes in the transaction are too high to proceed without competent representation. While a FSBO can make sense in a residential transaction, it seldom pays dividends in a business sale.