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Mergers & Acquisitions: They're Not Just for Big Corporations

By: Kevin H. McKervey, CPA

When most people hear the term mergers and acquisitions (M&A), they think of huge corporations and mega-mergers like AOL-Time Warner, General Electric-NBC, or Bank of America-Fleet Boston.

But for every mega-merger that's on the front cover of the business magazines, there are thousands of mergers and acquisitions of small- and mid-sized businesses just like yours. In 2004, there were 8,064 middle-market M&A deals in the U.S. worth more than $152 billion combined, according to FactSet Mergerstat, LLC.

So, does a merger or acquisition make sense for your company? Let's take a look at this question from both sides of the table — the buying side and the selling side.

Buying a Business: One Way To Grow

There are many different ways to grow your business, and one of them is to buy another business. For most companies, there's a limit to how much they can grow internally (or "organically") before adding more staff and other overhead.

Buying another business is an alternative to organic growth that may enable you to add new and complementary products and services to your mix (i.e., vertical integration). Or maybe there's a competitor who's looking to sell, and joining together offers more potential benefits to both of you than continuing to operate independently.

The first question you should ask is a simple one: Why do you want to buy a business? There may be many different reasons, but the final decision should be the result of a strategic planning process and long-term vision for your business.

Does an acquisition help you meet your strategic goals and objectives? Does it strengthen your product line offerings? Does it give you deeper penetration into your market? Does it help you better utilize assets that aren't delivering an adequate return on equity? Will it increase your efficiencies, strengthen your purchasing power, or avoid duplication of costs?

On the other hand, can you meet your strategic and growth goals by some other strategy? Could you put more money into research and development, or hire additional salespeople? You must go through the discipline of answering these and many other questions like them before embarking on a business acquisition.

Finding Acquisition Targets

If after working through these questions you decide you do have valid strategic reasons for buying another business, the next step is to begin the process of searching for acquisition targets and performing due diligence on them. Acquisition targets may be fairly limited and obvious if yours is a niche industry or if your goals are narrowly defined. If not, an investment banker can help you identify possible targets.

In looking at potential companies to buy, remember that regardless of the purchase price or past sales or earnings of the company, what you are really buying is a future stream of earnings — or in other words, the ability of a business to generate profits in the future. If a business isn't generating enough earnings to provide an acceptable return on investment, and you're not sure you can make that happen, then you should proceed with extreme caution.

Beyond the financials, you also need to consider the cultural issues involved in an acquisition. Is the new business going to be culturally compatible with your existing business? In recent years we've read about large corporate mergers that made sense on the surface but broke down due to "softer" issues like conflicting corporate cultures.

As you get deeper into your due diligence and negotiations with a potential acquisition target, be careful to guard against "falling in love" with a company. Remember: When push comes to shove, you don't have to buy the business — you can always just walk away if you don't become too emotionally attached. The acquisition will be rational and make financial sense or it won't, so be sure you can tell the difference.

Selling Your Business: Steps to Take

Just like the decision of whether or not to buy another business, the decision to sell your business must also stem from your strategic plan. Again, you have to honestly assess why you want to sell your business: Are you ready to retire? Do you want to start another business? Are you feeling burned out? If so, maybe you just need a good vacation to help get some perspective on the situation.

Assuming you're not selling to employees or family members, one of the most important decisions you'll make in your preparations is your choice of an investment banker. The investment banker will serve as the "quarterback" of your team of experts and professionals who will guide you through the process of selling your business — a team that should also include an accountant and an attorney who are experienced in mergers and acquisitions.

The investment banker's most important role is that of "market maker." He or she will build a database of prospective buyers and then work to create interest among the buyers and, ideally, an auction environment for the sale of your business. The investment banker will also create a confidential memorandum that presents your company to potential buyers and highlights the most salient points.

A good investment banker will create a memorandum that attracts the right kind of potential buyers and positions your company to sell at the highest possible price. He or she will know what details to include and omit, what features of your business to highlight, what issues to address, and what questions to answer in the memorandum. The investment banker can also help you weed through the "tire-kickers" and focus on the best qualified buyers for your business.

Many sellers assume that if they're not selling their company in the public markets via an initial public offering (or IPO), then they don't need an investment banker. But this may be penny-wise and pound-foolish. The sale of your business is probably the largest and most complicated transaction you'll ever undertake, so it's wise to bring as much experience as possible into your corner.

We have experience in many aspects of the M&A process. For assistance in buying or selling a business, please contact Kevin McKervey at 248.208.8860.

248.208.8860 | 2000 Town Center, Suite 1800 | Southfield, MI 48075

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