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.

We’re taking a close look at FAS 141R as it relates to M&A, especially in light of the traditional year-end wrap-up of deal flow and our upcoming webcast on FAS 141R this week.  CFOs are beefing up due diligence efforts to ensure they are seeing deals in the light of the new accounting rules - a practice that we wondered about when the revised rules were put into play in 2008.

It is no secret that deal flow has seen a dramatic dip since 2008, to the tune of a 50 percent drop in activity.  However, there are signs of life out there and 141R should never be an obstacle to closing a good deal.   Dealing with 141R simply means building in more upfront time to understand the implications of the new accounting, which is dramatically different from the old SFAS 141.

Interesting focus lately on a couple of areas that relate to M&A in this environment; companies are getting more creative about deals and thereby run the risk of triggering tax issues that weren’t as prevalent in the bull market days. We wrote about this last week in TheDeal.com (check out the article called “Dealing with the Code“), and it seems to be top of mind in other areas as well.

Most recognized is the use of net operating losses (NOLs) to offset taxes and make deals more attractive; the inherent value of NOLs is earning some attention as companies take major steps to protect them.  This is outlined in TheDeal.com article but also highlighted in a recent piece from CFO Magazine about GM’s bankruptcy plans.  As the magazine writes,

the IRS substantially curbs the amount of NOLs that can be used when there’s a change of ownership. In that way, the government prevents corporations from buying loss companies just to latch on to NOLs for their accompanying tax benefits…[but] bailout plans can’t limit the taxable income of companies benefiting from them.

The historically difficult environment is giving rise to exceptions like this and to opportunities for acquiring companies to get creative with the way they structure deals.  Dealflow might be slow, but it’s still moving and knowing how tax issues can help or hurt transactions will be key as we close in on the latter half of 2009.