Free Advice

Small businesses can play the M&A game also

The national press, from Newsweek to BusinessWeek to the Wall Street Journal, has been filled with commentaries about all the recent mega-mergers. These commentaries have generally not been complimentary.

Whether it is the recent HP-Compaq approval or completed deals in banking, telecom or pharmaceuticals the general opinion is that bigger is not necessarily better. One of the Newsweek columnists stated that if corporate America ever got this stuff right he’d be out of a job and right now he has pretty good job security.

What doesn’t work for big corporations often does work for small business! A little research confirmed my thoughts that I’ve been talking to more and more small business owners who want to buy (and are buying) another company. Not to dominate, but for a variety of reasons. These reasons are pretty typical reasons why small businesses want to grow by acquisition.

Capacity/Customers

A big reason is to fill unused capacity. It’s costly to have a facility that has 50% utilization. Buying a competitor and servicing their customers increases the utilization and drives the overall cost of the product or service down.

Geographic

Be it across country or across town, having another location can make sense for a variety of reasons. It opens up a new set of customers, delivery to existing customers in that area is now cheaper and easier and that market may have a different seasonality or business cycle. This is much easier than doing a “start-up” in a new market.

No increase in overhead

Buying another business won’t significantly increase your overhead and may also give you more purchasing power with your vendors. Think of all the expenses that wouldn’t increase if you bought another firm and merged them into your operation. Telephones, utilities, accounting, rent and many more wouldn’t change much, yet sales would increase dramatically. The difference should go to the bottom line.

Talent

Can’t find good employees or management? Maybe it’s easier to buy them. The more skilled your people are (and need to be) the more this option makes sense.

Talent can also mean non-human talent such as equipment. And what about product? A recent project had me helping a client buy a company whose product he admired and wanted to add to his portfolio.

Go vertical

Whether you want to manufacture the product you distribute or vice versa, buying a link to the level above or below you may make sense. One company I know has their product made by a contract manufacturer. Their goal is to buy a firm with the manufacturing capability to make their product and take control in-house.

To be successful -- Plan

Once you decide an acquisition makes sense (and why it does), don’t just run out and knock on the doors of your targets. It’s now time to plan so you do things right. The more time you spend on planning, the lower your frustration level will be in the future.

Poor preparation is the reason many buyers (individual and corporate) fail. Here are 10 steps to acquisition success:

1. Preparation
2. Search & locate
3. Screening
4. Analyze
5. Due Diligence
6. Valuation
7. Deal Structure
8. Negotiations
9. Financing
10. Close the deal

The first three are the most important. The more time put into determining criteria, putting together a comprehensive search plan and having a quick screen process (so you don’t waste time on businesses you won’t buy anyway) the better.

As you determine criteria, keep in mind that a company has different objectives than an individual buyer. For example, an individual is a “financial” buyer. They must have salary, profits, growth, a job, etc. A company is a “strategic” buyer. They may not need a profitable company if it meets there primary objective. In fact, you may be able to purchase an unprofitable company, at a good price knowing that at the same sales level, without all the overhead that you will eliminate, it will generate profit for you.

Copyright 2002. John Martinka. All rights reserved.