For Corporate Buyers that Pursue a Disciplined Approach: 2009 is the Time to Buy a Company

Corporate executives at middle market companies understand that meeting investor demands for growth is difficult to achieve organically. Therefore, making strategic acquisitions are critical to building scale and growing revenues.

The impetus for pursing an acquisition have become even more compelling in light of the current challenging economic times, which has put downward pressure on valuation multiples. Indeed, a recent Boston Consulting Group report entitled “The Return of the Strategist: Creating Value with M&A in Downturns” underscores why a weak economy is often an ideal time to acquire a company.  Key findings of this report include:

• Corporate buyers are uniquely positioned to take advantage of the tough economic times, since they possess the cash to complete transactions, whereas the financial private equity buyers have been restrained from borrowing in the wake of the credit crisis.
• Acquisitions completed during recessions are twice as likely as upturn deals to produce long-term returns in excess of 50%, and, on average, create 14.5% more value for acquirer shareholders.
• The best type of company to buy during a recession is one with strong finances and relatively weak profitability.
• Corporate buyers can also increase their returns and likelihood for success by acquiring relatively small targets.
• Surprisingly, acquirers can also create value by paying above-average premiums, provided the underlying rationale for the deal makes sense.
• Acquirers in difficult economic conditions are better at identifying targets with unrealized potential, probably because of the disciplining power of downturns, when every dollar counts.

Yet, despite the promise of adding value from a discounted acquisition, the reality is still that the majority of acquisitions will fail to result in any cost savings or merger synergies. So, how do the top value creators in downturns pick the best targets? Read the rest of this entry »

Many entrepreneurs start businesses because they either:

1. Tired of working for the corporate world
2. Were outsourced, out placed or downsized from the corporate world
3. Learned a skill and knew that they could do it better.
4. Got angry at their boss and left their employer
5. Made the decision to work for themselves.
6. etc., etc. , etc.

Entrepreneurs were successful sellers, manufacturers, or creative/design/engineers who loved the enjoyment of doing it better than everyone else. Most started on a shoestring. They “bootstrapped the business” by borrowing from family, friends, credits cards, etc. They rapidly learned that building a business is a “stair step process”… i.e. at $1mm revenue, hire an office clerk/receptionist/order processor… at $2mm, hire a controller, move to a new location… at $5mm, hire a general manager and a salesman… and on and on. The more successful the business is… the more the founder will drift away from his first love… that which motivated him first to start the business. Instead of being able to spend his time calling on customers, now he’s reviewing insurance plans, studying risk management, trying to understand new OSHA regulations. As he realizes that it is time to begin building an exit strategy, not only does he want to “take some chips off the table”, he really doesn’t want to retire, he wants to do what he enjoys and move into the next stage of his life. Read the rest of this entry »

Most owners of privately-held businesses are the epitome of entrepreneurship. Most entrepreneurs are successful because of their “can-do” attitudes as well as their willingness to do whatever is necessary to make their businesses successful.

When it comes time to sell their businesses, their “hands-on” attitude leads many business owners to the belief they are the best salesman for their companies. “Who knows my company better than I,” many business owners say to us, “How can you do a better job describing my company than I,” they ask.

We, as M&A professionals, never purport to know more about our clients’ businesses than our clients. Neither would anyone at CFA espouse to know each and every buyer who could ever be interested in our clients’ businesses. Read the rest of this entry »