21 Jun Pros & Cons of Growth via Acquisitions
Anthony J. Citrolo, CPA/CBI, Certified Merger & Acquisition Advisor
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. 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, increasing the debt load, allocating capital for additional training and integration of the two companies’ accounting systems. Often, the main concern is one of focus. During a merger, the exiting owners need to continue effectively operating with the responsibilities of their core business at the top of their priority list. An unknown factor is how long will it take for the anticipated benefits from the two company synergies to be realized. Sometimes they are never realized and many times not maximized. Consider the fact that there are significant valuation benefits to be derived from accelerated gross and net incomes.
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 of 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 Zippo was a manufacturing company in Nassau County NY, manufacturing products for the airline industry, the medical industry and had many government contracts for parts needed in military vehicles. This 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. Long 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. Long purchased Company Zippo, paying a premium for the business. He realized after careful consideration and evaluation that the talent in Company Zippo would enable him to accept work previously declined. In addition, his machinery was newer and twice the speed of Company Zippo, permitting more output, but required retraining of the inherited staff.
Prior to the acquisition, all of Company Zippo’s employees executed an employment agreement requiring them to stay for a period of time ranging from 1-3 years. They were paid a bonus when the acquisition was completed. The result was that Mr. Long filled his excess capacity, improved the profitability of the acquired company, employed a higher quality staff and had Company for added value Zippo’s owner assisting him with retention 2 days a week.
Company Zippo sold at a premium and sold its building to a separate buyer. This successful outcome was the result of synergy, preparation, research and evaluating what type of acquisition would result in the maximum benefit to the business.
Consequences for transactions which might have not gone as planned 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 of not attained. In most acquisitions, unless there was fraud, the differences are minor and remediated. It is a generally accepted policy for the acquired company ownership or management be retained for a period of time, in order to preserve continuity of operations and retention of key customers.
It is clear that the ability for 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 should become increasingly enhanced to make an acquisition which fits the needs and provides a vehicle to supplement any organic growth in a company. The “Growth through Acquisition” philosophy provides terrific benefits for those who are prepared, patient and diligent.