A Brighter Way
A Brighter Way
A goal of most businesses is to grow over time. Business leaders must first decide if growth fits strategic plans for the company. If so, what's the smartest way to grow? Do you hire more employees or do you acquire or merge with other existing companies? While you almost always want to be growing internally given the appropriate resources, acquisitions can be an effective strategy to help your business expand its expertise, services and products to better meet your clients' needs or even attract new customers. If you're considering acquiring another business, here are some tips to guide you.
From the beginning, set parameters for how fast you want to grow and what type of company you want to acquire. What products/services will this company offer that best complement your business? Where is it located geographically and how large or small is it? Know what you want so you don't waste time considering businesses that won't fit with your company.
Make sure the company you're considering acquiring is in a strong financial position and that you understand all the legal ramifications of owning the business. You don't want to get into a situation where you're responsible for someone else's mistakes or hardships.
For example, you should review financial statements and tax returns for the previous five years or longer if possible. Determine if all payroll, sales, excise and other miscellaneous taxes have been paid and review the business minute book. It's also perfectly acceptable to ask for any asset and business appraisals or results of tax audits.
Also, is the company subject to any governmental regulations or restrictions or local zoning restrictions that will make doing business difficult? Are there any existing lawsuits and any contingent liabilities or environmental liabilities? Be sure to review the loan documents for any assets that are mortgaged or pledged. Taking the time to make sure the company is safe to buy will reduce the risk of future disappointment.
For a successful acquisition, make sure you understand the company's business practices and employee relations. Prepare a detailed list of products and services the company offers, a list of major customers by name, volume and product, and a list of major suppliers. You should also determine if the seller has any patents, trademarks or licenses you need to acquire and review all leases.
Next, prepare an organizational chart so you can see where you may overlap. Determine if the key individuals are willing to sign a non-competition agreement and review all employee fringe benefit plans. Are there any employment contracts with key personnel that you'll have to maintain? If you're looking at a company working with unionized employees, obtain copies of all union contracts.
The bottom line is that you need to consider the synergy brought to your business by the prospect and/or the synergy you bring to the seller's business.
Once you understand the financial and organizational responsibilities you'll be undertaking through a particular acquisition, you will be better prepared to make an offer.
First, find out if the company has growth potential. To do so, consider the economy of the community where the business is located. What trends, potential problems and opportunities can your foresee?
From there, you can prepare forecasts, budgets and the new business plan and compute an acceptable range of value for the company and an appropriate offering price. Your offer should take into consideration the depreciation schedule, the original cost, age and condition of the assets and how the sale price can be allocated among the various assets to get the best tax benefits.
Many mergers and acquisitions fail after the transaction due to lack of proper implementation. Give thought to how you will build a united front between two organizations coming from different backgrounds and how to make employees and clients feel at ease with the changes that are bound to take place.
Mergers and acquisitions are tricky business, and you shouldn't undertake it alone. Rea Strategic Solutions has M&A experts that can help you make smart decisions. Contact us today at 614.464.3343 or RSS@reacpa.com to learn more.
This article was originally published in The Rea Report, Summer 2005.
Note: This content is accurate as of the published date above and is subject to change. Please seek professional advice before acting on any matter contained in this article.
