It's happening in every industry: banking, health care, media, telecommunications and especially high-tech. It's merger mania, and it's a high-stakes mating game that has corporate behemoths grabbing up every independent company they can get their hands on.
According to the 1997 Technology Mergers & Acquisitions (M&A) Report from Broadview & Associates, a New York-based investment bank, the total number of M&A transactions in the information technology, media and communications industries grew 25 percent globally and 31 percent in North America. This mass of M&A activity in corporate America has left small business owners eyeing this growth strategy for their own companies. While the stakes aren't quite as high, and the deals don't usually make newspaper headlines, a merger or acquisition can be an excellent growth strategy for small businesses that need additional resources and leveraging power to compete and/or grow. It can also be a smart exit strategy for entrepreneurs who want to move on to other ventures, but also want their business to live on.
Bob Brauns, president of Marketplace Technologies, Inc. in Cambridge, Mass., says not only is M&A a valid small-business growth strategy, but it is also the only way such businesses can achieve above-average growth rates. "Most businesses grow 10, 15 or 20 percent per year," he explains. "If you're trying to achieve quantum jumps in growth, mergers and acquisitions is really the only way to do it."
The following is an overview of the M&A process. Keep in mind that such transactions are very complicated, and there are experienced investment banking firms and licensed business brokers that can assist you. In fact, Brauns cautions entrepreneurs against going it alone. "Most sellers only sell one business in their lives, so they have no experience doing it. They may know everything there is to know about running their business, and they may think it's simple, like selling a house or something," he warns. "But it's very complicated, and it's so easy to make a mistake, so they should hire somebody who's experienced."
Step 1: Identify potential partners
Make a list of companies -- including your competitors -- that might have an interest in undergoing a merger or acquisition to leverage your company's assets, such as the management team, products, patents, manufacturing processes and equipment. Likely candidates will be companies that have complementary product or service lines or those that have similar target markets. Prospects can be found by word of mouth, placing advertisements in trade magazines, or by searching Web sites like Biz@dvantage or Hoover's Online.
Next, narrow down this list by verifying that the companies have the funds, management team and motivation to acquire or merge with your company. Also ensure that potential partners share your corporate culture and business philosophy. By conducting interviews, professional reference checks and in-depth financial analyses, you can weed out disreputable or financially unstable companies.
While you're searching for a partner, you may want to consider shielding your employees and management team from the fear associated with a possible merger or acquisition. Since there are so many unknown factors at this point, keeping your partner search under wraps will prevent rumors from circulating and panic from spreading among key players. Losing important staff members can weaken your company, complicating the M&A process and giving your competitors an edge over you in the process.
Dean Sena, president of World Business Brokers in Miami, Fla., sold three of his own companies, including a car dealership, a nursing home and a hospital, before becoming a broker for others. He says that confidentiality was vital during his buyer search. "If I lost my service manager at a car dealership in Lakeland, Fla., how many others around there could I find? There isn't an abundance of them, like there is in the big city," Sena explains. "With a hospital, confidentiality was important because the doctors might have gone somewhere else or moved patients somewhere else."
Step 2: Set a price
Serious partners will not waste a minute of their time working with you if they think your selling or asking price is unreasonable. The value of the business will be based upon a number of factors, including sales, earnings potential, market position, years in business, goodwill, patents and brand name awareness. Because it is so important to determine the true market value of your company, this matter is best left to an accounting, banking or legal professional.
Step 3: Make your pitch
Send an introductory letter to the companies you've identified as likely partners, and set up a preliminary meeting. Let the key players know that you'll want them to sign a confidentiality agreement before you share private information about your companies. If they resist, it's best not to move forward. Reputable businesspeople will have no problem ensuring you that they will not divulge the information you reveal to them.
Prepare a presentation that will showcase your company and entice potential partners. Remember: This is your time to shine, so make your presentation the best it can be. Working within your budget, there are various technical elements that you can include to polish your presentation, such as a slide show, a mock Web site or an extranet. Include a detailed written explanation that highlights your management team, business plan, marketing strategy and financial projections.
Sena says examining a business' future revenue projections - rather than its past performance - is the key to sealing a deal. "This is not real estate you're selling. You can't compare it with a building that sold behind it," he says. "Most people don't want to know what a business did yesterday; they want to know what it's going to do tomorrow."
Potential partners will be a very critical audience for this presentation, so be prepared to answer difficult questions about every aspect of your business, and rehearse your presentation until you know it inside and out.
Step 4: Explore
Take your time during the exploration phase, as it is probably the most important part of the process. After all, you will be choosing the company that will determine the future of your company.
Make your business an open book to your potential partner, and ask him or her to do the same. Get to know one another on both a personal and professional level to make sure your philosophies and visions agree.
"The only way to really know your future partner is to spend some quality time with them," advises Michael Carter, principal of Southport, Conn.-based investment banking firm Carter Morse & Company. "In addition, call everyone you can who knows them. This due diligence should be done by several people, so there are checks on those biased for or against a transaction."
Be honest about your company's shortcomings and liabilities, especially pending lawsuits or credit problems, because they will be uncovered at some point. At the same time, play up the positive aspects of how you have resolved the problems or plan to in the immediate future. Generally, potential partners will not shy away from a deal if you are forthcoming about such information. They will, however, have serious concerns if they unearth the information on their own.
Step 5: Negotiate the deal
Most deals fall apart not because of price negotiations, but because both parties cannot agree on the terms and conditions of the deal. Do not waver on the points that you feel most strongly about, as you will have to live by the terms set forth in the contract for the life of your relationship with your partner. And be prepared to walk away from a deal that doesn't meet your needs.
Important issues to address during the negotiation process include:
The M&A process will usurp a substantial amount of your time and energies. Be prepared to spend anywhere from eight months to a year to structure a deal that works for both you and your partner.
Copyright © 2000 by Virtual Advisor, Inc. All rights reserved.
Prepping Your Company for M&A
by Carter Morse & Company
Preparing your business for a merger or acquisition takes extensive preparation and planning. While readying your company for such a transaction, be sure to address the following issues.
Make Money - Buyers look for earnings and/or earnings potential; they do not pay for the creative methods you are using to lower taxes or expenses. Prior to selling your company, find ways to maximize your earnings, such as implementing new promotional strategies or adding new products or services.
If your company is at a crossroads, the buyer will always assume the worst. So if you just came off a loss year, but you are confident that it will return to historic earnings, you may want to wait to sell until those earnings materialize.
Simplify - Streamline your business' legal structure, capital structure, accounting systems, shareholders list, compensation plans, insurance, and operational and people issues. If potential partners do not easily understand these items, they will shy away from the deal.
Clean Up - Not only should your business' physical premises be neat and organized, but all legal, financial and accounting documents must also be in order prior to a deal. Ensure that you are in compliance with all contracts, most notably those with your bank, union, suppliers, customers and landlord. Obtain a release of all liens except bank liens and those customary in the business. Resolve outstanding and pending lawsuits, especially ones material to the business. And obtain detailed financial statements from a qualified accounting professional.
Communicate - Deal with any shareholders' objections to a planned sale up front. Because they own equity in your company, dissident shareholders can hold up a closing, thereby killing a deal or making it very costly to buy them out.
Disseminate Power - Potential partners may be scared off by a company whose success relies heavily upon several key people. If your company falls into this category, split important duties among a few people or provide these "superstars" with new duties that are more replaceable.