PART 1

You have been in business for 10+ years, and the good news is that you are still in business. You have survived the early start-up years, working 80-100 hours/week, worrying about how you will make payroll, building customer loyalty, etc. You are at the point where your management team is dealing with most of the daily issues, you are consistently making the payroll, and the bank is not breathing down your neck. You are comfortable, but you may also be wondering about your future growth.

Then you find out that a related business in your industry that has a strategic location is up for sale. WHAT DO YOU DO? Do you expand or sit tight?

This scenario happens more frequently than you might think. Unfortunately, it may also cause a lot of consternation which could result in procrastination.

There are three basic questions you should ask that can help you quickly decide whether you should pursue the opportunity or pass on it:

1. Does the acquisition fit into your long term strategy? If your strategy is to grow organically in identical product/services, then it may not be for you. But, if you want to diversify or expand into related services/products this might be an ideal opportunity.

2. Will there be significant synergies or will the combination of the two companies make both entities better? In addition to the potential of each entity sharing services, the selling entity may have the location, the talent, the technology, the contacts, etc. that would help your existing business.

3. How will you pay for this purchase? If you are unable to pay cash for this purchase, you will have to finance some or even possibly the entire purchase price. You need to consider whether your existing company has the financial foundation for acquiring financing, whether you have a history of positive cash flows, and how strong your relationship is with your current lender.

If your answers to these questions make you uncomfortable, this is probably not the acquisition for you. However, if this opportunity fits into your long term strategy, there are significant synergies that could be realized and you have the money or the financing available to make the purchase, congratulations! Now let’s proceed to the next stage.

PART 2

We left off with the fact that a strategic business is now up for sale. The opportunity fits into your long term strategy, you can envision substantial synergies to owning this entity and financing may be achievable. What are your next steps?

At this stage, you need to ask yourself a few more questions.

Does your existing business have a firm financial foundation? In other words, does your existing business model produce cash flows that easily support your debt service and capital expenditure requirements? We always say that you should grow from a position of strength, not weakness. If your existing business is struggling to produce positive cash flow, then you may want to focus on getting your business back in shape before considering any acquisitions. We do not recommend buying a company in hopes that it will cure problems in your existing business. That is risky business!

The next question is whether you have the talent in house to integrate the acquisition into your existing business so that you benefit from the planned synergies as quickly as possible. Do they have the capability and the time to take on the many new tasks of integrating an acquisition? If you stretch your people too far, both businesses will suffer.

Here is the next key question. Are you willing to spend the time and money it takes in terms of financial and legal talent to;
a) Develop a proper valuation of the operations and real estate, if any,
b) Perform appropriate levels of due diligence,
c) Determine the proper legal structure, and
d) Negotiate all the purchase documents.
Keep in mind that you could go through all this effort and expense with the end result of not actually closing on the deal.

If you decide to move forward and are able to successfully close on the deal, you are not out of the woods yet. Below are some of the common pitfalls to acquisitions:

1. Not having enough financing to pay for the due diligence, closing and integration costs. Financial projections done before hand should be very conservative and incorporate an expected decrease in cash flow in both businesses for a period of time. The question will be by how much and for how long. This is not a time for being optimistic. Plan conservatively.

2. Not integrating fast enough. There is a tendency to relax immediately after the closing and worry about the tough integration later. That is a huge mistake. Implementing the plans for integration should start Day 1. It is absolutely essential to start capitalizing on synergies immediately.

3. Beware of CULTURE CLASH! All companies have their own personalities and it is important the employees know what is expected of them given the corporate personality. Success is dependent on everyone being on the same wave length. If the personality of a company has to change, then it is imperative that the change be communicated and enforced immediately.

Acquisitions can be fun and prestigious but proper planning and execution are required for success.

Blackline Strategies has a lot of experience with acquisitions. We would be happy to assist you in the evaluation of a prospective acquisition and the subsequent planning and execution of integrating an acquired company.