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Mergers and Acquisitions - a guide for SMEs

Written by: Phil Shipperlee

Article Overview: This is the first of three articles which taken together will provide a high level guide for anyone wishing to make an acquisition or to dispose of their own company through a sale. This article deals with the overall strategy of Sale, Acquisition &Merger and where it should fit within the wider strategy for your company. The next article will look at the issues for you as a buyer and the process used to acquire and the final article will look at the issues for you as a seller and how to go about finding a buyer.

Mergers and Acquisitions - a guide for SMEs

I always think the term Mergers and Acquisitions (M&A) is rather incomplete. While it is the case that having acquired, you will need to merge your existing organisation and the newly acquired entity, the term M&A leaves out the other half of the equation which is the Sale. So perhaps SA&M would be a more accurate term to cover the whole area of activity.

Who should read this?

Before you abandon the rest of this article because “this is not for us, we are not big enough” etc. SA&M is a valid strategy for any business of any size. Also, you will come to recognise through the three articles that some aspect of SA&M will be relevant to the majority of businesses at some time. You do not have to use this strategy in your own business but you must at least consider the options that it offers before abandoning it altogether and if you do choose not to go this route, then you must at least be aware of the consequences. So, please take the time to read the rest before deciding this is not for you.

Purpose of the articles

This is the first of three articles which taken together will provide a high level guide for anyone wishing to make an acquisition or to dispose of their own company through a sale. This article deals with the overall strategy of SA&M and where it should fit within the wider strategy for your company. The next article will look at the issues for you as a buyer and the process used to acquire and the final article will look at the issues for you as a seller and how to go about finding a buyer.

Why should I need to consider SA&M?

There are many reasons why a company might consider an acquisition or a sale but whatever those reasons may be, they should be part of a wider strategy for the business as a whole. Too often a decision to acquire, or to sell, is made as a knee jerk reaction to a tactical matter leading to a potentially large waste of time and worse still to potentially long term damage to the business due to a loss of management focus.

The most common and valid reasons to consider an acquisition include:

* To accelerate growth – acquisition can be faster than organic growth

* To enter a new geographical location

* To enter a new line of business

* To gain some new business or technical capabilities

* To gain market share

There are a number of common, but less valid, reasons to acquire such as “to wipe out a competitor” or perhaps to cover up the fact that you are failing to grow the business by normal organic sales and marketing means. In some fast moving sectors, such as high tech., public companies will sometimes use acquisitions to generate growth to meet the expectations of investors or financial analysts. This is an example of a really bad reason to acquire – the new entity could end up as a distorted and ill conceived business which simply does not work but, the acquisition did serve the short term purpose of impressing those who look in from the outside!

When you acquire you must make sure the new entity will work as a sensible business – the rule is that 1 + 1 must = more than 2.

The most common reason, and in many ways the only valid reason, to consider a sale is to realise the value that you have built up in your business by turning it into cash. In the article on selling, we will look at the issue of taking shares as well as or instead of cash.

Other reasons for considering a sale often stem from less happy circumstances and are usually connected with the business failing in some way leading to a desire to “get out of this situation”. Many owner managers get to a stage of feeling they have been beating their heads against the wall long enough and it is time to get off the mouse wheel and do something different, probably involving less stress. However, this feeling can occur with any group of directors or shareholders, not just the owner-manager, who have the collective responsibility for a company that is consistently under-performing.

A word of caution, selling because you feel you must get out, puts you in the category of what we call a “distressed sale” which is really bad news for you. A potential buyer, or more likely the professional advisor to the buyer, will smell your concern very quickly and will probably use your state of distress as a means to do a cheap deal with you. If you have spent the past 10/15/20 years sweating to build your company, do not spoil what you have by rushing the last fence. We will often spend up to 12 months grooming a company to make it an attractive proposition for potential buyers so that our seller gets a fair price for the company. The best way to get a good price is to have several potential buyers interested at the same time which will be the case if your business is presented properly.

Perhaps the essence of this is the word “fair”. There cannot be a deal without a willing seller and a willing buyer. Willingness will be influenced by many things but a fair negotiation and a fair price are the two most important.

Summary

*..Don’t dismiss SA&M out of hand.

* As a part of your strategic planning process, regularly review whether acquisition makes sense to achieve specific goals.

* Also consider, as a part of the overall plan for the business, what you will do when your time in the business comes to a logical conclusion. If you are not going to “pass the business on” what will happen to it when you are finished with it?

* At the very beginning, before you even start trading, think about your exit strategy. This may sound odd – I can hear you say something like “I have just started and already I am thinking about leaving!”. This is not so silly; building a company is like planning a journey – you need to know where you are starting from, where you want to get too and when you want to get there. Now you can decide the means of transport and the direction you will take. If, for example, when you start your business, you decide that your preferred exit will be by trade sale – this will influence the things that you do and don’t do along the way – it will help you to plan from day one. More on this in the final article in the series.


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