When people think about mergers and acquisitions, megamergers (mergers of huge corporations) often come to mind. This is to be expected; the largest mergers in history have happened during the past 10 years. However, megamergers make up a small part of overall merger and acquisition activity.
A majority of mergers take place among smaller companies. Middle-market mergers and acquisitions, which involve transactions between $10 million and $100 million, account for about 45 percent of all mergers and acquisitions. Even more mergers—50 percent of all mergers and acquisitions—involve small, closely held companies, many of which are not even publicized.
For small or midsized companies, such as roofing contracting companies, mergers and acquisitions can be the key to more successful, longer-lasting businesses. And with merger and acquisition activity increasing steadily, it is important for you to be aware of some of the benefits mergers and acquisitions can afford your business, as well as a few potential drawbacks.
An upward trend
During the mid- to late-1990s, merger and acquisition activity reached a record high. Activity declined during the turn of the century but has started picking up again. This upward trend is expected to continue for a variety of reasons.
For one thing, private equity funds have surplus capital to invest. These funds are willing to pay for profitable companies in the middle market.
Also, many people have lost money in their investments in other companies. The managers of these firms may feel compelled to give money back to their investors, and if an entity walks in with the ability to buy everyone's stock for a higher price, insiders and officers may feel compelled to give their shareholders a better return and, therefore, allow an acquisition or merger to take place.
Additionally, as baby boomers age and prepare for retirement, they often are more accepting of lower valuations of their businesses. Even if a business's valuation once was higher, an aging business entrepreneur may sell for a lower valuation to reach retirement sooner.
Some advantages
A primary advantage afforded by mergers and acquisitions is they can increase business longevity. Entrepreneurs operate businesses during their lives, and, unfortunately, upon their deaths or retirements, their businesses often cease to exist. This, in turn, can eliminate a source of income for a business owner's family, as well as the jobs associated with the business. However, a merger or acquisition can extend a business's life beyond its original owner's retirement or death.
A merger or acquisition also can allow a business to break into new markets with greater ease. Entering a new market often can be difficult or even impossible. However, with a merger or acquisition, a business owner simply can buy his or her way into a new market quickly and efficiently.
Mergers and acquisitions also can help reduce supply chain costs. For example, consider a television station that pays a supplier for use of the supplier's movies. The supplier raises the movies' costs to the extent the television station can't make a profit and has to stop showing them. This results in the supplier losing a lot of money and considering bankruptcy. Instead of allowing the supplier to go bankrupt, the television station buys the supplier and fires the supplier's management. Newly hired management then effectively reduces the movies' cost to the television station, and both companies become profitable.
This is an extreme example of how supply-chain costs can be reduced by a merger or acquisition, but it vividly depicts the concept. If your business frequently purchases large quantities of materials from a common supplier, it may be more cost-effective to buy that supplier than face price increases.
Additionally, businesses often suffer from poor capacity in their product lines. Acquiring another business with a similar product line can increase capacity. Furthermore, an acquired company's expertise can become the acquiring business's property.
Types of buyers
There are different types of buyers in the market, and each buyer has different intentions. Buyers typically are classified as financial buyers, strategic buyers or consolidators.
Financial buyers buy businesses for the internal rate of return. The price they pay is a function of the expected cash generation. These buyers tend to spend more for businesses during times when they can borrow money at a lower interest rate. An acquired company's existing management usually is allowed to stay for three to five years. These types of investors are able to recruit highly skilled management to strengthen their teams when needed. Financial buyers currently are the most common type of buyers.
Strategic buyers, in contrast, often look for companies possessing the following characteristics:
The third type, consolidators, tend to buy companies at premiums with the intent of grouping them together and then building liquidity to issue an initial public offering.
Preparing to buy
If you are considering acquiring a business, determining the price you can afford to pay should be the first step you take. Settling this beforehand and having adequate financing can allow you to seize an opportunity when it arises. Keep in mind, 40 to 50 percent of merger and acquisition costs can be financed.
It also is important you have an acquisition strategy in place. Your acquisition strategy should include when, where and how an acquisition will be made. Having a strategy in place ahead of time will allow you to be better prepared to recognize when a potentially beneficial situation presents itself and react accordingly.
Additionally, focus on the future—establish a plan for your business to integrate with the newly acquired business. Plans made ahead of time can prevent future confusion.
And importantly, when hoping to buy a business or perform another merger or acquisition activity, remember to be patient. Most mergers and acquisitions do not happen quickly. Deals often take years to finalize. The important thing to remember when involved in such transactions is to be as proactive as possible in terms of planning ahead.
Preparing to sell
If you are looking to sell your business, the first step you should take is to obtain a detailed valuation of your business. This will allow you to see what your business is worth and help you decide whether you actually want to sell it for the price at which it is currently valued or hold onto the business until a later date.
Next, you must market your company to potential buyers. A list of potential buyers should be compiled, contacted and screened before offers are accepted. Be patient during this step of the process—not all buyers are ready to buy a company for the price asked, and this step can take several months.
Once potential buyers have decided to buy, offers will be made. You then must decide which buyer's offer to accept. Your agent should guide you through all steps of the sale, including negotiations, due diligence and consummation of the deal.
Key considerations
It is critical you have competent advisers and counsel during the sale of your business. A valuation that is too low easily can eliminate millions of dollars you are entitled to in a transaction. And if your business is marketed and sold to the wrong buyer, you could lose money, as well.
Also, keep in mind that selling a business requires good timing. You must take market forces into account. This may require many hours of planning. If this is not done, you may either have to delay retirement or accept a lower price than what you want for your business.
A hot market
Merger and acquisition activity is expected to continue to increase, and your business can benefit from this hot market. Knowing what you are looking for and planning ahead can lead to a successful and beneficial merger or acquisition for all involved parties. As the population ages and the market picks up, you should be aware of and investigate merger and acquisition-related opportunities that could benefit your roofing contracting business.
And remember, it is imperative you work with professionals who know your business and industry and can assist you in all phases of selling or buying a business.
Bart Basi, Ph.D., CPA, is a licensed attorney in Illinois, Kentucky and Pennsylvania. Basi is presenting an educational program during the 2008 International Roofing Expo Feb. 21-23 in Las Vegas.
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