Clearly, merging with or acquiring another firm can be one of the best ways to grow your company rapidly. You might be able to significantly boost revenue, literally overnight, by acquiring another business. Achieving a comparable rate of growth organically — by increasing sales of existing products and services or adding new product and service lines — could take years. In this column I’ll examine the potential benefits and drawbacks of M&As and offer suggestions for reducing risks.
This could be a boom year for M&As. According to a report in the journal Transaction Advisors, corporations and private equity firms expect a step-up in merger and acquisition activity this year — in both number and size. (More than 1,000 executives at corporations and private equity firms with annual revenues of $10 million or more were surveyed.)
Potential benefits and drawbacks
There are, of course, multiple factors to consider before making such a move. On the plus side, an acquisition might enable your company to expand into new geographic areas and new customer segments more quickly and easily. You can do this via a horizontal acquisition (acquiring another company that’s similar to yours) or a vertical acquisition (acquiring another company in your supply chain).
There are also some potential drawbacks. For example, it’s a costly process, from both a financial and a time-commitment perspective.
Thus, you should determine how much the transaction will cost and how it will be financed before beginning the M&A process. Also try to get an idea of how much time you and your key managers will have to spend on M&A-related tasks in the coming months — and how this could impact your existing operations.
You’ll also want to ensure that the cultures of the two merging businesses will be compatible. Mismatched corporate cultures have been the main cause of numerous failed mergers, including some high-profile megamergers. You’ll need to plan carefully for how two different cultures will be blended together.
Reduce M&A risks
The best way to reduce the risk involved in buying another business is to perform solid due diligence on your acquisition target. Your objective should be to confirm claims made by the seller about the company’s financial condition, clients, contracts, employees and management team.
The most important step in M&A due diligence is a careful examination of the company’s financial statements — specifically, the income statement, cash flow statement and balance sheet. Also scrutinize the existing client base and client contracts because projected future earnings and cash flow will largely hinge on these.
Finally, try to get a good feel for the knowledge, skills and experience possessed by the company’s employees and key managers. In some circumstances, you might consider offering key executives ownership shares if they’ll commit to staying with the company for a certain length of time after the merger.
There may be a merger tidal wave this year depending on what happens with the economy. The result may be a release of a pent-up demand for acquisitions among private equity firms and strategic buyers. So consider your options.
This has been a brief discussion of a complex subject and is not intended as advice. If you are thinking about a merger or acquisition, consider seeking qualified professional assistance.
Norm Grill, CPA, (N.Grill@GRILL1.com) is managing partner of Grill & Partners LLC (GRILL1.com), certified public accountants and consultants to closely held companies and high-net-worth individuals, with offices in Fairfield and Darien, 254-3880.