Is It Appropriate For Your Clients? Some Benefits & Risks ...

 

Acquisitions provide business owners the opportunity to grow their business faster, achieve their goals sooner and avoid the often painstaking slowness of organic growth. With some preparation and good decision making, the business owner can realize a level of growth and success not otherwise available. Other benefits include acquiring talent to assist the organization, the ability to move into a territory which has a distinct need for the owner's services, synergy between company's products, an increase in profits and a rise, often dramatic, in the value of the company.

 

Some acquisitions involve rolling up or absorbing competitors, while others bring a product or service which has legs to the existing customer base. Conversely, the acquired company has customers who have a need for the buyer's products. If done with proper diligence, the acquisition should be a win‐win situation. One main consideration is he enhanced value of the combined companies which results from the addition of both gross revenues and net income. A larger net income generally results in significantly higher overall company valuation.

 

But this doesn't happen without risk. Many of the risks can take down both companies in a very short time. Risks include the merging of two typically different cultures, a dramatic increase in necessary debt service, allocating capital for additional training and integration of the two companies' systems. Oftentimes the main concern is one of focus. In the midst of a merger, the exiting owner's priority needs to be his core business. It is often challenging to continue operations in a primary business while seeking an acquisition. Another unknown factor is the time it will take for the anticipated benefits from the two company synergies to be realized. Sometimes they are never realized and many times not maximized.

 

Preparation is considered the key before any contemplated acquisition. It is not uncommon to look at and review several or dozens of potential deals before 'pulling the trigger. Most owners who are unfamiliar with acquisitions need to experience and evaluate multiple opportunities. Conversations are necessary with professionals in your industry; your trusted advisors, other business owners and anyone who can help identify the qualities which would be ideal for maximum benefit to be realized. Here is an example. Company Z is a manufacturing company in Nassau County, NY, manufacturing products for the airline industry and the medical industry, and had many government contracts for parts needed in military vehicles. The company has been manufacturing for 30 years with the same ownership at the same location. They have 12 quality machinists, trained in this highly skilled manufacturing process. The acquirer was Mr. L, whose company is also a manufacturing company. He had recently sold a piece of property, had excess cash and thought he could grow his business through an acquisition. He had space in his facility to accommodate an ∙addition. Mr. L purchased Company Z, paying a premium for the business. Mr. L had been looking for almost 18 months and easily recognized this to be a "great fit" for his company. He realized after careful consideration and evaluation that the talent in Company Z would enable him to accept work previously declined. In addition, his machinery was more modem and had output that was twice the speed of Company Z's 30‐year‐old machines, permitting more output, but required some staff training. The result was that Mr. L filled his excess capacity, improved the profitability of the acquired company, employed a higher quality staff and had Company Z's owner working with him strengthening existing relationships with both customers and employees. Company Z sold at a premium. As you can see, it is about synergy, preparation, research and evaluating what type of acquisition would result in the maximum benefit to the business.

 

There are consequences for transactions which might have not gone as planned. Often they depend on the contractual obligations of the parties. Many deals today have an "earnings target" built in with adjustment in the form of increased or reduced compensation if the target is either exceeded or not attained. There are some cases where the combined entity just doesn't operate cohesively, due to a decline in employee morale or management disharmony. Special attention needs to be given to key employees, whether in emotional or financial terms with tangible rewards available for outstanding performance. These employee issues need to be addressed prior to any LOI or ' agreement is in place. Management that needs to be retained should have a stay agreement and a bonus structure available to assure complete cooperation and compliance.

 

It is abundantly clear is that the ability of an organization to grow through acquisition is greater today than ever before. Considering the anticipated business exodus of many "baby \ boomer" business owners, the opportunity exists and should be available for several years to make an acquisition which fits the needs of the company and provides a solid vehicle to supplement organic growth. The "Growth Through Acquisition" philosophy provides terrific benefits for those who are prepared, patient and diligent.

 

Anthony J. Citrolo is the president and CEO of New York Business Brokerage, Inc. and a founding member of Reliance Strategies. His office is located at 68 South Service Rd., Suite 100 Melville, NY 1I747

 

For more information on "Growth through Acquisition‐Targeted Acquisition Plan" and "Exit Strategy Plans, " please contact Anthony Citrolo at 631‐390‐9650