If you’re thinking about growing your small business enterprise consider buying another business as one way to quickly double the market share and profitability of your company. The academic term is ‘acquisition’ but in its most basic terms it means purchasing an existing business and merging part or all of it into another company. In the 1988 film, Working Girl, the loveable Tess McGill struggled to get ahead and when her business ideas were stolen by her boss, she puts her sights on taking the boss’s job in ‘Mergers and Acquisitions’. The subsequent merger of a group of radio stations into the fold of a large conglomeration proves to be business success for Tess. If you have the drive to build your business, take a lesson from Tess and investigate small business acquisition. There’s big business and even bigger opportunities in bringing two companies together, if you have the right mix of products, services and people.
Steps for acquisition success:
1. What type of acquisition are you seeking? Buying a business isn’t as easy as walking into the owner’s office and writing a check. First you need to decide why your business needs to expand and which components of another company would best serve your business’ growth plan.
a. Are you seeking customers, manufacturing capability, or distribution channels?
b. What type of long term impact are you hoping the merger will accomplish?
c. Are there legal, legislative or other contractual obligations that will need to be crossed before the process can continue? Some industries such as communication companies (like radio stations), investment advisories, and insurance companies are heavily regulated by the government and must seek approval prior to entering into any agreements for purchase or sale.
3. Perform a business valuation. Before you acquire, valuate. It’s essential to perform due diligence of the company that includes a formal business valuation and feasibility study. With these two investigative documents you will begin to understand the nature of the business you wish to acquire. A feasibility study will help to identify both strengths and weaknesses of the business’ profitability. With the study in hand you will be able to defend the purchase to investment capitalists, lenders and even vendors who will be extending your new organization credit. The valuation will provide you with hard numbers regarding the business’ financial health, ability to borrow and any outstanding financial liabilities. Finally, the documents will provide you with a window into the future earning potential of the business with regard to market share, liquidity and even intellectual property value. Go into the merger without this information and it’s like driving a race car blind. You may have a good feel for the wheel, but the road will elude you every time.
4. Every sale has pros and cons. Know the advantages and disadvantages of buying an existing business before you start the process.
· Business has an existing customer base
· Business has instant cash flow because of existing inventories, orders and receivables
· Business has good brand recognition and customer loyalty
· Inventory or receivables may not provide the return or become uncollectible
· Profit margins may become tighter due to unforeseen economic shifts or changes in the market
· Customers may not respond well to a name change or shift in management
5. Decide how you will pay for the new business. There are numerous ways to acquire a business that include cash, stocks, seller-held financing, product and other contractual arrangements. Before you shake hands, know what your limits are with regard to your current business’ cash flow, ability to extend credit and even rights to intellectual property and copyrights.
6. Get a noncompete. Merging companies, even when everything goes well, can be a challenging and lengthy process. Be sure that you include conversations with the previous owner’s regarding agreements to not compete for the same market. This will help to ensure the future success of your business entity. A noncompete agreement is a legal document that prevents an individual, group or business from aggressively marketing, selling or working within a geographical area from the newly merged business. The agreement benefits the new business by restricting the ‘old’ leadership from taking the existing customers for a specific time period, usually one to three years.
7. Advisory Arrangements. Often merged businesses will keep the business owner or leader from the merged company on board in an advisory capacity to help ensure a smooth transition. If you intend to offer such a position, be sure to carefully outline the duties you would like him or her to fulfill and the length of time you wish to have them stay.
Expanding your business is an exciting time that can be fraught with perils if you don’t do your due diligence first. To learn more about buying businesses and how they can positively impact your company’s bottom line, talk with a PASBA business professional in your area.
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Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230.
Copyright Information 2011 Professional Association of Small Business Accountants