As you think about the upcoming sale of your firm, you’re probably not thinking about buying another company. But, in the first installment of this series, we identified the primary financial reason why you should consider it. As is, your business might sell for five times earnings (EBITDA). Buy another firm and the combined company might sell for six times earning. That’s because larger companies sell for higher multiples. If we say the business you purchase has the same level of earnings as your firm, in this example, you will expand your net sale proceeds by 40%. This math does not even include earnings expansion from cost savings, etc.
In the second installment, we talked about who you might want to buy ... from a strategic standpoint. For you, buying a peer in the same industry and same market might allow you to become the dominant player in your market. Or, you might want to buy a peer in the same industry but in the next town to become a “regional” player. Or, you might want to buy a firm in a related industry to vertically or horizontally integrate product or service lines. Before you start shopping, you need to know the type of company that you are going to target.
Once you have decided that an acquisition makes financial sense and the type of company that you are going to target, you want to wade into the pool and not dive into the pool. There will be a lot of excitement and there will be a desire to just do a deal. Call it the “Honeymoon” Effect. But, understand that about 70% of mergers and acquisitions “fail.” That doesn’t mean someone goes bankrupt. It means the deal failed to meet planned financial and operational goals. You have to maintain discipline and not care if the deal goes through. You have to be willing to pull out of the deal at any time. But, recognize that you will have investment bankers in the mix -- who receive a “success” fee only if the deal goes through. Imagine the pressure they will exert.
This is not to say you are demanding that everything go your way. There will be items of negotiation and compromise. But, if you find that company cultures are fundamentally different and will not mesh, you need to recognize the likely consequences post-deal. If the target’s owner wants to stay on, what are the expectations and how might that owner adapt to no longer calling the shots? What happens if the target has a silver health insurance plan and you have a bronze health insurance plan? What happens to target employee morale if you lower them to bronze? You get the idea. You can imagine a whole host of issues that crop up.
Turning to your own firm, you have to recognize about yourself a tendency to say, “What are you going to tell me about my company -- that I’ve been running for 20 or 30 years -- that I don’t already know?” The owner of the target is going to be saying the same thing. As you go through this exercise of thinking through an acquisition, you will come to know the issues the ultimate buyer of your firm will be thinking through. You will come to know those aspects of your firm that might be weak or be done differently. So, even if you never buy another firm, you might come away with a better understanding of your own firm and start to do those things to prepare it for sale.
