Barrels of ink have been spilled over the past two years chronicling the precipitous decline in the M&A marketplace. While the struggles brought on by the global economic slowdown are given constant attention by the business press, far less time has been devoted to those who have the potential to take advantage of this (hopefully) once-in-a-lifetime economic environment.
Yes, despite the most difficult economic climate this country has seen in generations, some firms are in an excellent position to come out ahead. Some small to mid-sized businesses in particular have - for the time being - a competitive advantage when it comes to growing via strategic acquisition.
These strategic acquirers find themselves with a leg up since private equity, their primary competition for target companies, has been forced to the sidelines as a result of the credit crunch. As banks loosen the purse strings, though, private equity is finding their way back to the pitch. As they do, the window of opportunity for small businesses gets a little bit smaller every day (read more on this in Time to Shine: Three Crucial Questions about Strategic Acquisitions.)
For now it’s open, and every small business executive should be asking three questions:
First, are you a buyer? Many business leaders may not normally consider themselves to be a strategic acquirer, but in light of the current situation each should reassess their position. A smart, synergistic deal can vault a company ahead of the competition, even if the plan had previously only been for organic growth.
Secondly, can you stay true to your strategic motivation for acquiring? The due diligence process may prove that an otherwise great company can’t provide what you need, or for some other reason is a poor fit. Don’t become so enamored with the idea of a deal that you can’t walk away if it turns out the potential acquisition doesn’t align as nicely as originally anticipated.
Finally, how can you most effectively manage risk? Even the most synergistic merger will still bring a fair amount of risk with it. To mitigate this, the use of seller paper and earnouts are popular tools. Both structure the deal so that payments are spread out over a period of time, and the latter requires certain benchmarks be reached before payouts are dispersed. Acquiring businesses can also make use of Net Operating Losses for the tax benefits, which Craig described last year.
The tea leaves in the marketplace and surveys from executives indicate that competition for the best deals is only going to increase as the economy improves. There is still time to act, but the window is closing. A well-structured deal now could place a small business in a better position to meet short term goals and to prosper over the long term as well.
That said, no deal should ever be rushed through. A full review and analysis, including of corporate cultures, management style, business process, and other factors should all be examined carefully. Only after the review is complete, and once it is clear the deal still makes sense and is being pursued for the right reasons, will it be time to close it.