By: Brian MacMillan | Managing Director Mergers & Acquisitions
There are two main ways to grow a business: organically (increasing your customer base, obtaining new contracts, growing current client relationships, etc.) and through acquisitions. Growing a business organically is commonplace and is the method that most businesses are comfortable implementing. Many small- and lower-middle-market business owners do not fully understand how to go about acquiring another company and many erroneously believe it is only large businesses that can acquire other companies.
Growing a business through acquisitions can be a great way for any sized business to expand. Small- and middle-market companies are actually best situated to improve their market position through acquisitions. Acquiring another company can allow business owners to quickly: add significant revenue and profitability; enter specific markets where they may not have a foothold; and add talented employees. For example, a government contractor with a great track record in the information technology space and a significant work history with the Department of Energy may find it difficult to obtain contracts in other departments such as the Department of Homeland Security. However, it can quickly gain access to the Department of Homeland Security by acquiring a company that is already working with it. This acquisition can provide the company with access to revenue and profit-producing contracts that they otherwise might not have been able to win.
However, acquiring another company is not easy and can be more difficult for an organization if they do not have a well-thought-out proactive strategy. A recent study by Deloitte indicates that “serial acquirers” were much more successful than companies that were ”ad hoc acquirers.”
Most small- and middle-market companies cannot afford to hire their own team of individuals to actively pursue acquisitions. However, engaging a good outside Mergers & Acquisitions team can be an effective way to proactively target companies that may be good acquisitions for your company.
Mergers & Acquisitions professionals can guide you through the entire acquisition process. You can continue to focus on running your business while your M&A Advisor searches for acquisition targets on your behalf. As a third party approaching other companies in your industry, including your competitors, your M&A Advisor will likely be able to obtain more information from a prospective seller than you would if you approached them directly.
Once engaged, your M&A Advisor will help you determine the type of business you want to acquire. Specific industry segments should be discussed along with the geographic location in which to acquire, the size of business that would be the best fit, and other criteria. Your M&A Advisor will develop a list of specific target companies to approach and contact them confidentially on your behalf. He/She will enter into non-disclosure agreements with any interested parties and obtain relevant information that will allow you to make a determination on whether the company is the right fit. This information can include financial statements and tax returns, contract details, employee information, etc.
After reviewing the details of the target acquisition with you, your M&A Advisor can schedule a conference call or meeting with the owner of the selling entity to answer any additional questions you may have about the business and help determine if you will be able to work with this individual or group to get the deal closed and through the transition. Owners of small- and middle-market businesses can sometimes be emotional when contemplating the sale of their businesses. One of the main roles of M&A Advisors is to keep the emotion out of the transaction as much as possible. As a third party, the M&A Advisor can minimize the impact of strongly held sentiments to help ensure that the transaction is successfully completed.
If you determine that the business is one you would like to pursue, your M&A Advisor will help craft an offer or Letter of Intent for the business. An experienced M&A Advisor should also be able to introduce you to other professionals (due diligence specialists, M&A attorneys, etc.) that are crucial to successfully completing an acquisition. Some M&A Advisors can also facilitate the financing required to purchase the target company, as they would have developed relationships with local, regional, and national lenders.
Acquiring other companies can be a great way to grow your company’s revenue and profitability. However, there are a number of considerations to keep in mind: What type of company would be the right fit? How much should I pay for the company I am acquiring? Is there financing available to help my firm make the acquisition? Please contact BWFA’s Mergers & Acquisitions team at (410) 461-3900 to help answer these important questions and enable your firm to successfully grow through acquisitions.