Hello again, Tim Barrett here... One of our four practice areas is mergers and acquisitions. We only do M&A work in conjunction with our three other practice areas,which are: 

• Turnaround and Workouts
• Emerging Growth
• Family Business Succession Planning

For a business that is having difficulties posturing for a merger with another company, or to be acquired preserves the strengths of the business and supplements voids and areas of weakness with a suitable M&A partner.

For a company in growth mode, a strategic acquisition or merger may prove to be the most cost effective way to expand revenue and profits, versus investing in the costs associated with penetrating a new market and taking on one or more significant competitors.

Having a family owned business does not necessarily equate to having the next generation that is able, ready and willing to take the reins of management and ownership. In many cases such a desire does not exist, that's where a merger or acquisition can prove to be a valuable tool.

Let's talk about acquisitions specifically in this blog entry. So, is an acquisition right for you? Let's take a moment to find out.

Why Do Acquisitions?

There are many good reasons for acquiring another company. These include:

• Expanding your markets
• Acquiring people, systems or processes
• Acquiring new products, services or customers
• Achieving economies of scale
• Reducing expenses
• Creating opportunities for cross-selling
• Acquiring new distribution systems
• Eliminating competition

These represent only a partial list. Ultimately, however, all legitimate reasons for contemplating an acquisition fall under one all-encompassing umbrella -- the desire or need for quick and substantial growth.

When you get down to it, the only real reason to do an acquisition is to create significant growth. Whether you want to move into another geographical area, add new product lines or gain new distribution channels, it still comes down to the desire to grow quickly. If you want to grow incrementally, don't bother with an acquisition."

To tell if an acquisition makes sense for your business, start by asking three simple questions:

• What are the different ways I could grow my business?
• Could an acquisition help me achieve that growth?
• What larger, strategic goals will the acquisition help me accomplish?

Assessing the Risk

Although acquisitions offer potential for rapid growth, they also carry a high risk factor.

Never do an acquisition just for the sake of doing it or because the opportunity presents itself. If you want to grow quickly and other alternatives don't meet your needs, then consider doing an acquisition. In many cases, a partnership, strategic alliance or some other option may accomplish your goals with far less risk. Never get so caught up with the idea of making a deal that you forget about alternative ways to approach the situation.

Why are acquisitions so risky? Primarily because they require spending a lot of time and money on something you can't completely understand. You take a business that has been operating for 10 or 20 years and try to understand everything about it in a matter of a few weeks or months. Even when you acquire a company very similar to yours, you can never uncover all the skeletons in the closet.

In addition, financing the acquisition typically relies on the future earnings of the company, which come with no guarantees. In today's markets, even revenue streams with rock-solid track records can vanish overnight. Throw in all the people issues -- key players jumping ship, turf battles, unclear roles, indecisive management, etc. -- and it's no wonder that so many acquisitions bite the dust.

Hallmarks of a Successful Deal

Contrary to popular belief, a successful acquisition does not mean that you managed to close the deal. In fact, signing on the dotted line represents only half the battle.

Successful deals depend on many factors, including some that occur only after the ink has dried on the agreement. A successful acquisition means that you improve your P&L statement and balance sheet in a reasonable period of time, which we define as 18 to 24 months. In today's world, don't think you can lose money during the first two or three years and then strike gold in the fourth or fifth, because it won't happen. If you can't improve your P&L within 18 to 24 months, you don't have a good deal.

What makes for a good acquisition?

• Having a solid foundation in place, meaning your people, systems and resources are sufficient to handle integrating another company.

• A well-planned acquisition strategy.

• Realistic plans in terms of expectations and time schedules.

• Appropriate price and terms, with a "realistic" debt load -- one that allows you to meet your interest expenses, pay down the principal and still have a cash cushion. It should also allow you to start making money on the deal within 24 months, even if you don't pay it off by then.

• Clear and well-executed people/transition plans.

• Reasonable additional capital investment requirements.

• Being clear about your personal and professional expectations before making the deal. Know what you want and why you want it, and be honest with yourself and your advisors about what you want.

Before making any M&A deals, ask yourself:

• Will this acquisition increase our profits?
• Will it improve the balance sheet?
• Is the risk acceptable?

If you can't answer "yes" to each question, don't do the deal.

After having read this blog entry you feel that an acquisition may be an option for your company or one of your clients, please feel free to give us a call for a free initial consultation. Our toll free number 866-913-4100.

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Until next time...