The Strategy Behind Business Acquisitions
You might think that the most successful acquisitions result from a well-developed strategy, but that it isn’t always the case. In order to execute an acquisition strategy, there have to be business owners willing to sell their businesses, a phenomenon which is impacted by many variables and cannot really be controlled by an acquiror. What is the case is that business owners who complete successful acquisitions do not forget about addressing and perhaps re-evaluating the business’s long-term strategies in light of business acquisition opportunities that do arise. In addition, companies that have a strategic interest in acquisitions must be ready to act when opportunities do present themselves.
After completing a strategic analysis of your business, including its strengths, weaknesses, opportunities and threats, acquisitions can be considered as a way to capitalize on strengths, address weaknesses, exploit opportunities and a defend against threats. In many ways, then, acquisitions can be a key business strategy.
The key strategic reasons for considering acquisitions include survival, defense, growth and profitability.
Survival. Survival is a key business objective. An acquisition is sometimes made to address an issue that threatens the survivability of a business. Some of the reasons that an acquisition might contribute to survivability include improving the business’s competitive standing, increasing the depth of management talent, reaching critical mass and profitability.
Defense. Acquisitions can fulfill the objective of defense. In its simplest sense, it may be an appropriate to make an acquisition to keep a competitor from making the acquisition and gaining a competitive advantage.
Growth. Acquisitions can be an approach to achieving the growth objectives of the acquiring business. When organic growth slows or becomes unsustainable, acquisitions can help fill the gap.
Profitability. Acquisitions can be made for the purpose of enhancing the short-term or long-term profitability of the business. Short-term profitability improvement can come from allowing the business to reach critical mass – a level at which necessary overhead and marketing expenses can be spread over a larger revenue base, improving margins. Long-term profitability enhancement can come from synergies that may take longer to realize, including such synergies as revenue enhancement from cross-selling and leveraging buying power with suppliers.
Beyond the four key strategic reasons for considering acquisitions, acquisitions can be a realistic way for a business to:
* Increase its market share.
* Expand its product line.
* Increase its territorial reach.
* Eliminate a competitor.
* Add one or more desirable locations.
* Add management depth or key employees.
* Create an opportunity for cross-selling.
* Create a more sustainable business
Even if a business is considering an acquisition primarily because the “opportunity happens to come its way,” it is wise for an acquirer to address what strategic objectives will be addressed through a potential acquisition along with what the potential impact may be of walking away from a strategic acquisition opportunity.
Seller Financing in Business Sales: Don’t Rule it Out Completely if You Want to Get Your Deal Done
One reason that seller financing must be considered is that it may affect the price that a business will sell for as well as the length of time it will take to sell a business. The reason is pretty straight forward. In many cases, the inability of a buyer to complete a transaction is not due to a problem with the business being sold, but a problem with the ability of the buyer to obtain adequate financing for any of a variety of reasons, particularly during periods of “tight credit.” The seller then is left with the choice of letting a potential sale get away or lowering the price until the purchase becomes financeable. Structuring an element of seller financing is often a solution that preserves value.
Another factor that may cause business sellers to consider a component of seller financing is the fact that it may permit a seller to take advantage of more tax planning opportunities by permitting it to move part of the gain on the sale of a business into a later period, deferring taxes while perhaps generating a higher return than the seller can get from alternative investment opportunities. This often represents a very real economic incentive to consider seller financing.
In today’s lending environment, many lenders require an element of seller financing before they will consider making a business acquisition loan. For example, some lenders will want the buyer to make a 20% down payment and the seller to finance 20%, leaving 60% for the lender to finance.
Specifically, loans guaranteed under the U.S. Small Business Administration’s 7(a) program are a major source of small business acquisition financing. While there is not an absolute requirement that there be seller financing for such loans, that is the norm. Under current requirements, the SBA will generally require 25% “equity” in a project, with the “equity” including the buyer’s down payment and qualifying seller financing. In order for it to qualify, seller financing can have no required payments of principal or interest during the first two years. Interest can still accrue during this period. Based on these requirements, some transactions will be structured with two different elements of seller financing, one which qualifies as “equity” under SBA guidelines and one that doesn’t.
There are many ways to structure seller financing. A common structure would be a note which is amortized over five to ten years, but with a balloon payment due after two to five years. This gives the buyer the time to get the business going and, perhaps, to refinance his acquisition financing under more favorable terms.
Another approach is to make a portion of the purchase price payable under a formula – a percentage of revenues or earnings for example. This structure is sometimes called an “earn-out.” This has the advantage to the buyer of matching the required payments to its actual cash flows. If the seller is confident of the future performance of the business, this kind of a structure may be highly desirable to both parties to the transaction. A buyer will often be willing to pay a higher price with an earn-out. This is an approach that can be used to resolve a disagreement over business valuation.
Seller financing will generally be junior in security to third-party financing, so it should be carefully structured to produce the best result. The following are some considerations which can improve the standing of seller financing:
· The seller financing can be secured by a specific asset. This is unusual, but if real estate is involved, for example, the real estate may be structured as a separate transaction with a security interest.
· Seller financing can be structured with balloon payments required within two-to-three years reducing the risk that holding paper over a longer period may produce.
· Balloon payments may be required when certain pre-established performance measures are met.
· A requirement can sometimes be included that earnings or cash flow over a certain level must be used to pay-off the seller financing.
· In a few cases, a seller may be in a better position if it provides all of the financing, preserving its security interest and rights in the event of default.
While we usually think of seller financing as some thing that is primarily associated with one relatively small business acquiring another small business, many large corporate buyers attempt to use seller financing for a variety of purposes, including maintaining credit lines, increasing returns on acquisitions, giving substance to noncompetition agreements and reducing risks associated with acquisitions not working out as anticipated.
If carefully structured, an element of seller financing will often help a seller realize its objectives by increasing the valuation of the transaction and accelerating its timing, while limiting the risk that one would normally associate with providing such financing.
When To Sell Your Business
We are often asked: When is the best time to sell my business?
The answer is simple: the best time to sell your business is when both your business and market conditions are strong. Selling your business at this time will allow you to realize the greatest value from the sale.
Market conditions are considered strong when there are more buyers than sellers actively pursuing businesses similar to yours. Despite occasional negative conditions, it is often the case that market conditions are strong for the green industries. Two of the factors that most influence market conditions are availability of financing to business buyers and the range of market valuations which directly affect the attitudes of potential buyers.
Without a doubt, the best time to sell your business is when your business is strong, growing and showing good results. There is no question that the combination of a strong market and strong performance by a seller will produce the best results in a business sale.
Many, if not most, business sales result from unplanned life events and, therefore, may not occur at the optimum time. You cannot control overall market conditions, but you can influence how well your particular business is positioned for sale. The good news is that over time, market conditions for most aspects of the green industry have remained strong.
Regardless of market conditions or the situation with your particular business, one important step is that when you make the decision to pursue the sale of your business, you can move aggressively to put the best possible face on your business: Clean up the business, literally and figuratively. Clean up your physical location, get your books in order and push hard to keep the business running on all cylinders.
About The Principium Group
Our professionals have assisted buyers and sellers in hundreds of transactions.
For buyers, Principium provides assistance and counsel in strategic planning, identifying potential acquisition targets, due diligence and planning for successful integration of acquisitions.
For sellers, Principium provides assistance and counsel in evaluating strategic alternatives, identifying and negotiating with potential acquirers and assisting with transactions from due diligence through the closing process.
We understand that the decision to buy or sell your business is a profound one, and we pledge to work with you in a professional and confidential manner while we help you navigate this often confusing process.
Whether you have immediate plans to buy or sell a business or may sometime in the future, we would welcome the opportunity to talk with you about your business.
Leaders in Green Industry Mergers & Acquisitions