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Converting A Crapshoot Into A Coup


Special Report (Enterprise) FINANCE -- ACQUISITIONS

CONVERTING A CRAPSHOOT INTO A COUP

Buying a business can be exhilarating. Selling a business is often traumatic. And both can be very frustrating. These emotions tend to complicate things when you're trying to arrange a deal. "Risks in an acquisition all come from one thing: a lack of maintaining your objectivity," says James E. Schrager, senior lecturer at the University of Chicago Graduate School of Business.

When you're selling your business, the most emotional issue is likely to be whether you want to stay involved after the sale, or at least retain a stake. The vast majority of sellers want to exit the business. This is the best strategy, says Susan E. Pravda, an attorney specializing in mergers and acquisitions with the Boston firm Epstein Becker & Green. She warns that owners who stay on "are almost always unhappy. They are used to running the firm exactly the way they want to. The culture of the firm will undoubtedly change, and they won't be happy with it."

COAT OF PAINT? While mulling this issue, you need to pursue the other steps toward a successful sale as dispassionately as possible. First, you'll need to consult several financial advisers. If you want to have a competitive bidding process, retain an investment banker. Many won't work with companies under $20 million in sales, so you may need to go to a smaller, regional firm or a business broker. Often your local bank or accounting firm can help. You can expect the cost of professional advice to run between 2% and 5% of the sale price, but it may be worth it.

Before you start talking to buyers, find out how much your business is actually worth, then make sure you portray your balance sheet and income statement in the best possible light. You might also think about reducing excessive salaries that bloat your cost structure. Settle pending litigation and other potential roadblocks to completing the deal. Even something as simple as giving the company's office a fresh coat of paint or doing some landscaping can help the purchase price.

Be prepared for a lengthy due-diligence process. Resolving tax, legal, and financial questions involving the structure of the deal can be more stressful than you expect.

Take advantage of the current seller's market. You may have several suitors, which should give you bargaining power to negotiate a favorable deal.

From the buyer's side of the table, one complication can be the euphoria that typically sets in. Often, the exciting atmosphere of dealmaking leads to overpaying. John Chuang, president of Cambridge-based MacTemps Inc., a temporary-placement company, admits getting a charge from the frantic phone calls, high-pressure ultimatums, reams of documents, and investment bankers rushing from room to room. His first acquisition of another temporary-placement outfit reminded him of the kind of high-stakes dealmaking he had only read about in Barbarians at the Gate. "You have to know at what point you're just going to walk away," Chuang says.

It's crucial that your acquisition be part of a carefully tooled strategic plan. Too many buyers seek growth for growth's sake. Analyze the deal's long-term prospects. Are anticipated synergies really achievable? Will projected economies of scale really materialize? Will the two cultures mesh?

When you negotiate the deal, make sure to provide incentives for key managers to stay on. But be wary if the seller's CEO or owner wants to continue to play a major role.

Whether you're a buyer or a seller, you need to resist the worry that you have to get in on the consolidation wave as soon as possible. Before you move, says University of Chicago's Schrager, "You better have a strategy that works. Big is not particularly better."BY AMEY STONE IN NEW YORKReturn to top

TABLE

Where the Action Is

Top Industries for Small-Business Mergers*

INDUSTRY VALUE

BILLIONS

BANKING & FINANCE $2.50

COMPUTER SOFTWARE, 2.01

SUPPLIES & SERVICES

LEISURE & ENTERTAINMENT 1.09

INSURANCE 0.96

MISC. SERVICES 0.78

(from auto repair to day care)

HEALTH SERVICES 0.77

WHOLESALE & DISTRIBUTION 0.74

DRUGS, MEDICAL SUPPLIES, 0.71

& EQUIPMENT

BROADCASTING 0.67

RETAIL 0.60

*Transactions under $50 million during 1995

DATA: MERGERSTAT

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