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Wednesday, August 15, 2012

Mergers and acquisitions take thought and planning

In a recent discussion with the CEO of a private company, an acquisition became the dominate topic.  Starting a company and spending years building a business means the founders put their lives into the business.  They want the business to succeed and the team to participate in the rewards of any successes.  Time is always a factor and when the time reflects on your age and considerations of retirement, succession planning or selling the business become a stronger consideration than in the earlier years.

The business becomes part of your family and you see the business as something you grew from infancy.  Those that supported you in the business growth are friends and family.  When two business owners initiate a discussion regarding a business combination, many considerations beyond valuation become topics.  A few examples are:

·        Will the current team remain for some period to facilitate building the combined businesses?

·        How will the acquiring party pay the departing parties for the business?

·        Will a workout be part of the acquisition strategy?

·        Can the parties get along and work together and for how long?

·        Can they get out of the deal if it seems not to be working?

The decision to combine businesses is a serious one and requires a lot of thought and planning.  The finances and valuations must provide the desired exit(s) for all of the founders.  Considerations of who remains and for how long is important.  Two aging founders creating a combined company need to have succession planning for the remaining business.

A few topics that must be considered before your enter the discussions and began finalizing the details of a combination are more personal.  The following topics are just a few:

Define your goals - Deciding to combine your business with another means one of you will likely depart at some point.  At a minimum, one of you will be running the combined business.  Thoughtful consideration of whether you can be the departing party or no longer running the business is a consideration.  In addition, you may be planning an exit.  What are your goals in the combination and what are you seeking as a return on your years of investment.

Integrating the businesses – Integrating the businesses needs to make sense and there needs to be a purposeful objective.  In combining the businesses, two teams must come together and the cash flows must work.  Combining businesses and not achieving positive cash flows could be a recipe for disaster.   

Valuations – Consideration of individual valuations will take place no matter what.  One company will buy the other or merge.  The relative valuations will determine the final ownership percentages or price to pay. However, the valuations of the combined businesses must make sense.  This is where the sum of the parts should be vastly different from the combined company.  Many utilize the terminology of 1 + 1 is equal or greater than 3. This means that the combined entities should have a significantly higher value than the sum of the two companies.

Future business – Defining the goals of the combined business are important.  The ability of the new business may be able to enter markets neither was able to access before.  Perhaps, they have a difference in sales strategy that will allow for a greater market capture.  There should be discussions and thought on where the newly combined businesses will go in the future.  This is part of developing a combined business plan!  Do you remember the business plan?  You will want one for the new company.

 Have you considered how you feel about not being the BIG DOG?
  Taffy Williams is the author of:  Think Agile:  How Smart Entrepreneurs Adapt in Order to Succeed to via Amazon