By Maurie Cashman
An acquisition is one of the many strategies a business owner should examine as part of a long-term ownership transition plan. Unfortunately, even though they can add substantially to the value of a business, acquisitions are often completely overlooked. Acquisitions have both advantage and disadvantages that need to be weighed carefully to ensure that they are building value in the eyes of a future owner.
Company Value One advantage of pursuing an acquisition as an ownership transition strategy is that it can result in a higher valuation in the eyes of a buyer. For example, if you acquire a company that is in the same industry as you are, letâ€™s say produce distribution and then go to market with the resulting business, you may be much more likely to attract multiple buyers for the company. This can push the value of the business higher as more buyers compete for your business. It may also open up additional industries or geographies into which you can market the business.
Employee Retention and Motivation You may have a stable of very able managers whom you need to retain in order to maintain the value of your core business. These managers are likely interested in advancement and additional challenge. Acquiring a competitor or complementary company may give you the opportunity to provide these managers with additional challenges, motivation and financial reward while protecting your core assets, the employees.
Synergies One of the main disadvantages of entering a market via acquisition is the opportunity to capture synergies. These come in two forms. First is the ability to spread your existing management team and other fixed overhead over more sales. If you can run both companies with your HR, Accounting, Purchasing, Marketing teams, or at least part of them, you can drop more revenue to the bottom line. If you can eliminate facilities and more fully utilize the ones you retain you can further enhance returns.
The second form of synergy is more strategic. If you can acquire new customers and suppliers or further penetrate those you already have through acquisition you can gain huge advantages in purchasing and pricing power, not to mention customer service. Most companies would rather deal with a provider who can provide more solutions than less.
Culture One thing to be careful of in acquiring another company is that it not destroy value. This most happens when cultures clash. It can be very advantageous to acquire a company that is good at marketing and sales if you are weak in that area and vice versa. However, be aware that these are very different cultures and a clear plan for integration of the two should be prepared by someone who has been through this type of transition and closely monitored.
Attracting Buyers Acquisition can be a very effective strategy because it can attract different buyers. If your plan is to sell your company to a third party you need to be very aware of the different buyer markets that exist. For example, most Private Equity Groups have very definitive criteria for the size of companies they will engage with. Many strategic industry buyers have similar criteria. Sometimes they are looking for a bolt-on opportunity for an existing platform. The key issue is that it takes just as long to conduct negotiations and due diligence on a small company as it does a larger one, sometimes more. If you want to attract as much competition for your business as possible you need to understand that size matters.
Financing Often-times lenders see larger businesses as lower risk. This is why the larger companies can often acquire financing at higher lending percentages and lower interest rates than smaller companies. An acquisition may also involve some seller financing that can be advantageous to both the seller and the acquiring company and make the company more attractive to a new acquirer or easier to finance if being sold internally to management or family members.
Acquisitions can play a large role in maximizing the value of your business, if done correctly. But always remember: you are not alone!
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