Contrary to popular belief, you don't need to have millions of dollars to your name or run a Fortune 500 company to combine your corporation or LLC with another business entity.
Bigger is better, as the old saying goes, and a lot of times that's true for business as well.
Traditionally when it comes to growing, you'd think about building your business through increasing sales gradually, which takes time and comes with its own set of challenges. But what if you could do it overnight? You can with a merger.
Many business owners avoid mergers and acquisitions. They believe they might lack the know-how, it might be too expensive or it could hurt their business in some way. But when done right, a merger doesn't require any upfront capital or debt and can benefit you in more ways than you think. I've seen it happen often – businesses mesh together and become stronger and more valuable than they were individually.
One of the biggest reasons to engage in a merger is to build a succession plan. If you want to climb the entrepreneurial ladder, you have to get to the point where you work on your business – not in it, necessarily. To get there you need to have capable people in place to whom you can pass a variety of business operations.
And for that, you'd typically look at people working for a business like yours and see if you can headhunt them and agree to work for you. Instead, however, you could merge with a business similar to yours and hand the other CEO the reins.
They've already been doing what you're doing. They know the business landscape, the challenges and the opportunities. A merger like that would free you up to continue growing through acquisition and keep your shareholder stake in the business.
Why not capitalize on that?
Another reason would be so you can tap into a different market. Maybe you're doing the same thing as another similar business, but they have a different focus. Remember the Facebook/Instagram merger?
Both social media platforms, but on different platforms and with different sets of user bases. Or Charter's acquisition of Time Warner Cable, which let them reach new areas with broadband by taking over existing infrastructure. A merger like this can help you reach audiences that you never could have before.
Diversifying assets is another reason. Acquiring a company in a different region or a different type of business gives you extra flexibility – when one source of revenue dips, another can pick up the slack.
And you don't have to be a huge business to carry out a merger. Ninety-eight percent of businesses in the United States have less than 20 workers, and mergers between smaller companies happen a lot more than you'd think. For every Time Warner Cable and Charter merger, there's a Joe's Lawn Service and Green Care Yards meshing their resources.
When tech firm Pitney Bowes began their acquisitions program, they realized that it was "faster, cheaper and less risky" to expand by acquisitions than organically. They're not the first to realize that. But the thing that stops a lot of people is the "how."
So, with that in mind, how do you acquire a business?
Identify your objectives.
Widely accepted among investors, there are four key reasons why you should consider a merger:
- The financial synergy would prove most beneficial for both involved parties.
- Financially speaking, it would adhere to what investors label "best practices."
- The acquiring entity is looking to quickly scale their business offering.
- Succession planning is taken into consideration.
A similar business is easier to merge with, because you've both already answered the following question: "Is this industry something we're really wanting to commit to?" Plus, a merger doesn't require any capital. It's a swap of shares into a newly created special purpose vehicle between the two merging entities.
An acquisition like Charter picking up Time Warner Cable is a great example of this kind of merger. One company acquires another that has a fair bit of overlap, and it's easy to integrate them into the operations that already exist. The leadership team knows the market already. They may even know each other by reputation, if not in person.
If you're merging into a different area, though, the acquisition has both significantly higher risk and significantly higher reward. Facebook's acquisition of facial recognition software company Face.com is an example of this.
Facebook isn't in the facial recognition business, but it realized that technology could be of benefit to its long-term goals. These types of acquisitions often run at a loss for a little while, but they're important, because they lay the groundwork for future growth.
Are you trying to bring on a business that's similar and adjacent to yours? Or are you trying to expand into a new area? That will help you choose your direction. You can break these down further into categories like vertical integration, industry roll-up, competition elimination and more, but these two questions are the first ones I ask myself when I'm thinking about an acquisition.
Focus on the fundamentals.
Now that you know the different reasons why you would merge, it's time to figure out what fundamentals matter most to you. I like the idea of synergies as it allows me to acquire companies that let me cross-sell products, combine resources and open up new markets.
I also usually want a company that's solid already. You can do well picking up distressed assets too – some people focus solely on that – but if the company has a good foundation your acquisition will be much easier. Whatever the case, the following four fundamentals should always be at the forefront of your mind as a new, inexperienced buyer of businesses.
The first thing you're probably going to want to do is contact a broker to find out which companies are looking at mergers.
In reality, however, that's the last thing you should do.
Most brokers have been in business for a while. They have a certain way they've done business and a certain deal structure they want. They aren't usually open to alternate deal structures, and it can be tough to make them back down.
Brokers tend to make a fair bit of their money from upfront fees, too, and they have the incentive to inflate company valuations, because people tend to go with the broker that gives them the most flattering valuation.
Always be looking for new deals. In my experience, this is one of the hardest parts of the process. When you start looking at an acquisition, you have to start with a fairly wide net and narrow down. As corporate finance company McKinsey notes, companies that want to do five to fifteen acquisitions a year often start with around 150 prospects.
Check public information about the company first. SEC filings, news stories, web pages and job listings are great places to start. Touch base with people who know them by reputation. Are they well liked? Do they do good work?
Then once you've figured out what your best targets are, it's time to pitch the company itself. Ask if you can tour the facilities. Meet with management. Find out how well they'd mesh with your existing business. Check their numbers and make sure they match with the public ones. Does their culture match? Can you use their staff to improve your company?
Review their internal documents, including business owner requirements, P&Ls for the last few years, their top customers, and anything else that will help you make a decision. Much of this may be contained in a confidential information memorandum.
2. Build rapport
If you learned how to do mergers and acquisitions in an MBA program, you need to forget what you've learned. Most of the time when people learn how to do mergers and acquisitions they approach it from a procurement standpoint.
It's a high-pressure sales environment where you're finding faults, looking for loopholes and issues and trying to get an edge over the business owner. That's all well and good when you're dealing with corporate finance. But you want to target owner-managed businesses.
When you're dealing directly with the owner it's a fundamentally different process. Just like business to business sales, it's about building rapport. You need to get to know them and their business intimately.
As top salesman Grant Cardone notes, the score is in the follow up. You don't just touch base with someone once. You keep coming back, showing them that you care about them and their business.
3. Collaborative deal structuring
If you've done the step before this correctly, you've built a rapport with the owner and have a basic understanding of what they would need to consider a merger or acquisition. Now it's time to drill down.
Every business owner has problems, and when you're trying to figure out how to structure the deal you need to find their motivation. Is their cash flow poor? Are they wanting to retire? Is the business taking up more of their time than they expected?
Most business owners will probably say everything is great and they just need money. Don't believe it. Keep digging till you find the root of the main problem they're facing, then show them that you can help.
You need to work together to find a solution that works for them. Do an initial phone call, follow up with a big fact-finding phone call and build up your rapport with them, take that information away and do some homework, then meet face to face and make the offer. It's a process – a collaborative one – not just a sale.
4. Create an SPV and swap shares
The most intuitive vehicle for most mergers and acquisitions is going to be an SPV, or special purpose vehicle. This is a separate company used for acquisitions and mergers. Both companies will place their shares in the SPV, which becomes a larger holding company that encompasses both.
The SPV tracks its assets, liabilities and equity on a separate balance sheet. At this point, both your original company, and the company you're merging with, are part of that same overarching holding company. But they still have their separate balance sheets.
This is a flexible way of acquiring or merging with businesses. You can set up as much or as little control as you like for each company, and with the SPV structure encompassing both companies, you don't need the same amount of capital you would for a straight-up merger.
Add your company to the one you want to merge with in the SPV and voila. You're now a bigger, more imposing company that's double the size.
Sometimes, if the company is distressed but has good fundamentals, it can be shockingly cheap to acquire, especially when you're talking about small or midsize businesses. Sometimes a company can even be acquired for little to no money down, as recently took place as part of a Harbour Club case study for entrepreneur-turned-investor, Lee Johnson.
In his situation, Johnson managed to acquire four different businesses in four months, one of which was producing $3 million in annual revenue – all for no upfront money, allowing him to finalize the purchase without going into any kind of debt. Remember, though you may go back and forth or negotiate on the offer at this point, valuation can be a fortunate "sticking" point.
After you've made the offer, you may need to register changes with your state. If you're using a holding company it will simplify things, as you won't need to change bank accounts, licenses and permits, or do a legal closing of the old business.
Take your business to new heights.
Whatever process you take, with the right acquisition you can immediately turn your business into a significantly bigger, better version of itself. You can open up new markets, vertically integrate your operations, diversify your operations and reap all sorts of benefits.
If you've never thought about it, why not? Take the opportunity and use acquisitions to supercharge your business's growth!