By Greg Demetriou and Jeffery Bass
Having acquired four companies over the last several years, it is helpful to understand some of the salient points along the way.
As a business grows and matures it sometimes becomes necessary to grow more rapidly. Often that entails acquiring an existing business. If you have not gone down this road before, it can be a minefield. It is not only necessary, but in our opinion, mandatory to have expert business advice in the form of a consultant, an attorney and an accountant, all three that are quite familiar with acquisitions. There are nuances, processes and details to attend to when researching our target companies.
Acquisitions should be considered if, after careful financial, operating, and corporate cultural analyses, the acquired company is deemed to be accretive to the acquiring entity. A strategic acquisition cannot only of itself increase revenues, cash flow and profitability. It can also bolster the acquirer’s internal selling processes.
As our award-winning company approached its 30th anniversary, it was in position for a significant expansion. Management, shareholders and business advisers identified that acquiring one, two or three synergistic companies would expand our book of business, add resources, and open new markets. Armed with a specific criteria of the target companies we wanted to explore, we began reviewing companies available for sale.
Significant due diligence must be performed on a prospective acquiree even prior to signing an NDA. Companies positioned for sale, especially those represented by competent and known business brokers, will have detailed financial information, management biographies, market segments in which the company operates, organizational charts and, of course, the asking price. If still interested and following the execution of a more detailed non-disclosure agreement, a significantly deeper dive into the company’s financial position, internal dynamics, marketing and selling processes, etc. must be performed.
A trend that we both recognized and questioned were seller discretionary expenses being included in the multiples of asking prices. In our previous acquisitions 2.5 and 3.5 times EBDITA were pretty much in the middle of the road for lower than middle market companies (under $5 million in revenue). SDE’s are basically the pass-through items that owners accord themselves paid by the company.
The use of so called “Seller’s Discretionary Expense” should not be used as basis for determining the asking price. The acquirer should not be expected to pay a multiple of the value of the current owner’s cars, boats, etc. An objective and honest sales price is derived from a multiple of either revenues, EBIDTA or net income.
After the deal is done, your work begins in earnest. The changes that you considered ahead of time now must be implemented. But first you must live in the culture of the acquired company and assess how the changes will affect the overall performance, atmosphere and ultimately the profitability of the combined entity.
A successful acquisition is not only a growth tactic, but a considerable challenge to the management skills on staff. An assessment must happen without rose-colored glasses. Are your managers capable of being effective with larger, more complex departments and personnel. A cautionary note: know when to hire more skilled managers and directors. The acquisition process may seem daunting, but when handled with a skilled and experienced team, it can be the right move for expansion, increased revenue, cash flow and profitability.