Due diligence at the outset is a must for a smooth acquisition transition
By Richard Hellan, for SBT
Exploring and managing merger or acquisition activity requires discipline. "Shoot from the hip" decision-making can lead the business owner to become extravagant and wasteful of hard-earned dollars or make "penny-wise and pound-foolish" decisions. Such decisions can be devastating at the end of the day.
Proper exploration and due diligence requires the investment of a business owner’s time, the support of key personnel and considerable assistance and guidance. From the get-go, a well-thought-out plan of action is required. For small business owners, that plan should start with them taking an honest look at themselves and at their companies.
I suggest small business owners follow these guidelines when they start down the pathway to merge their businesses or buy a business to achieve personal and/or corporate goals.
1. Reflect upon your life plan and your existing strategic business plan – A good business plan is a "state of the union" report prepared to serve as a roadmap for management of a company.
As such, it is reflective of a variety of factors, including the visionary capabilities of the principals, their willingness to take risk and their sophistication in financial analysis.
It reflects their understanding of the company’s market, their perception of customers’ wants and needs, the culture of the company and the financial strength of the organization.
Business owners should begin any journey toward merger or acquisition by taking an honest look at themselves and the company they are leading.
A well-constructed plan is a tool to use to measure progress toward goals and to understand the need for modifying or changing thinking.
If merger or acquisition activity was not identified as a viable and important strategy for growth and development at the beginning of the plan year, then why is it considered to be viable and important at this time?
Is the thought of growth through merger or acquisition fueled by fear or by sound business thought and financial analysis?
How will a merger or acquisition enable the business owner to better realize their personal mission?
How will it enable the company to better achieve its mission?
Is this the right time in the owner’s life to lead their company down a new avenue which will be demanding and requiring his or her personal best?
2. Prepare your company for merger or acquisition activity – Serious exploration of merger or acquisition as a strategy for growth should not occur without "buy-in" and support from key personnel and trusted advisors.
The savvy business owner should recognize the desirability of having those persons generally supportive of any major change in the company’s plan for development.
The receipt of serious skepticism or criticism should be taken seriously and processed accordingly. There will be considerable preparation to do in-house before welcoming visits by the principals of merger or acquisition candidates.
Attorneys and accountants will need advance notice to assure that preliminary documents can be developed in a timely manner. Banking relationships will need to be reviewed and possibly strengthened. Debts may need to be restructured, and some loans may need to be paid down.
Human resource initiatives may need to be enacted and marketing initiatives accelerated. Employment agreements will need to be examined and weighed for current merit, and changes may need to be discussed. Family obligations and promises, if any, will need to be noted. The long-awaited new corporate brochure may now beg to be made, and that long-ago proposal to spruce up the office might now be worthy of serious attention.
Whether an owner is interested in buying or selling, the journey begins at their company’s doorstep.
3. Conduct serious due diligence – Executive coaches, legal advisors, accountants, business brokers, venture capitalists and investment bankers often disagree on a variety of important matters, but few would disagree that serious due diligence is an essential component of merger or acquisition activities.
Each party will need to agree upon the timing of this activity, the specific information that will need to be revealed by one party to the other, and the process to be used for this information to be obtained and exchanged.
Too often, small business owners get far along in the courting game and then learn something that should have been revealed much earlier in the process. Agreeing upon a schedule for sharing proprietary information should take place sooner rather than later.
4. Know what your company is worth – Far too often, small business owners begin the search for a merger or acquisition candidate without a solid understanding of what their companies are worth in the marketplace at that particular point in time.
Often, they have an over-inflated valuation in mind, reflecting mostly their pride in ownership and the amount of "sweat equity" they have invested over the years.
Merger or acquisition discussions have a way of quickly leveling inflated egos of business owners eager to make a "killing." This is especially true in a weak economy showing little hope of short-term turnaround.
Owners and their advisors need to think creatively to come up with a deal structure that is satisfying to those involved, but that creativity must start with sensible evaluations of each company involved.
There are myriad of formulas and an array of qualified advisors who can help the small business owner get a grounded sense of what their companies may be worth in the marketplace.
Book value, liquidation value, comparative value, discounted cash flow, the use of multiples, excess earnings formulations — each of those tools can be helpful for determining a fair value for a given company, in a given industry, in a given market.
5. Use qualified, trusted advisors and skilled negotiators – A successful merger or acquisition can usually be traced back to a variety of factors, including the quality of the advice and counsel given to the principals throughout the exploration and negotiation process.
From the start of the search process and throughout the courting process, trusted and experienced advisors can do much to keep a business owner on-track and proceeding in an orderly and thoughtful manner. Too often, advisors are contacted late, when commitments that never should have been made have been made or implied.
Most small business owners only entertain merger or acquisition discussions once or twice. Because of the importance of such discussions, it’s a time for choosing the best persons to guide and assist.
If a business owner is not sure the right people are on board to represent their interests in these matters, then they should ask other experienced business owners or trusted advisors for referrals.
By Richard Hellan, president of Hellan Associates, an executive and business coaching firm headquartered in Milwaukee, for Small Business Times. He can be reached at 414-967-9012.
Aug. 8, 2003 Small Business Times, Milwaukee
