Is Now the Right Time for an Acquisition?
Merger and acquisition (M&A) activity tends to wax and wane along with the ups and downs of the national and global economy. Savvy business leaders know that an acquisition can be a great way to grow a company. If a deal comes your way, how can you judge it’s worth and value? Start by carefully considering both the pros and cons.
On the plus side…
Merging with or acquiring another company can help a business to grow rapidly. Increasing sales of existing products and services or adding new product and service lines through the acquisition of another business may significantly boost revenue at a much higher rate than trying to grow organically, which can take years.
An acquisition might also enable your company to expand into new markets and niches. This can be accomplished through a horizontal acquisition (acquiring another company that is similar to yours) or a vertical acquisition (acquiring another company along your supply chain).
Acquiring the right type of company can also generate efficiencies and synergies that can boost growth. Synergies are business characteristics and capabilities that complement and work well with those of your own company. Identifying an acquisition target that offers the right synergies can create a new, combined entity that is stronger than either business would have been on its own.
But watch out for…
Balanced against the possible benefits of acquiring another business are potential drawbacks that must figure in your decision. Completing an acquisition can be a costly process, from both a financial and a time-commitment perspective. Therefore, you should determine how much the transaction will cost and how it will be financed before beginning the M&A process.
It is also important to get a handle on how much time you and your key managers will need to spend on M&A-related tasks in the coming months, and how this diversion of resources might impact your existing operations.
Another potential drawback is loss of control. Depending on the way a deal is structured, some degree of control may have to be shared with the owners of the business you are acquiring. This is especially true if the owner or owners are not retiring but intend to remain actively involved in the merged entity.
It is important that the cultures of the two merging businesses be compatible. Mismatched corporate cultures have been the cause of numerous failed mergers. If you appreciate a more structured and “buttoned-down” approach but the management of your acquisition target is more casual and laid back, conflict may ensue. Plan carefully how the two cultures will blend in order to work together.
Due diligence is essential…
You can reduce the risk involved in buying another business by performing solid due diligence on your acquisition target. Your aim should be to verify claims made by the seller about the company’s financial condition, clients, contracts, employees and management team.
The most important part of M&A due diligence is a thorough examination of the company’s financial statements, including an income statement, cash flow statement and balance sheet. Another critical asset that should be scrutinized is the existing customer base and any customer contracts that are in place, as they are the source of projected cash flow and future earnings.
Finally, try to get a feel for the knowledge, skills and experience possessed by the company’s employees and key managers. You may consider offering key executives an incentive for remaining with the company for a specified length of time after the merger. Or, if they are essential to ongoing operations, you might even offer an ownership position in the newly merged entity to reward their loyalty and ongoing commitment.
Have a plan and pursue it with help…
An acquisition is one path to expanding and growing your business. But a successful acquisition requires intensive planning and preparation before taking the plunge. It helps to have guidance from a resource who understands the process. Gray, Gray & Gray has helped a wide range of companies to grow through a merger or acquisition. We understand both the big picture and the nuanced details that go into making the deal succeed.
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