Do you know about - Strategic Acquisition Strategies for Small Businesses
Height Finance! Again, for I know. Ready to share new things that are useful. You and your friends.Growth through acquisition should not be considered an choice reserved solely for large or communal Companies. Small and mid-size businesses that opt to grow by acquiring other companies, rather than growing one new buyer at a time, can gain benefits in addition to increased sales and profits.
What I said. It isn't outcome that the actual about Height Finance. You look at this article for info on a person wish to know is Height Finance.How is Strategic Acquisition Strategies for Small Businesses
Timing is Right - Two elements have combined manufacture growth through acquisition an intelligent choice for small and middle market companies.
Demographics - The maturing of the Baby Boom generation, many of whom own their own businesses, will growth the number of owners willing to consider selling to an historic high.
Financing - Money is available to finance small and middle market acquisitions. Banks and non-traditional lenders are aggressively pursuing acquisition lending at a level we have not seen in twenty years. Cash required to do a deal is at an all time low.
Profit Pays the Bills
Profit and Value are two main financial components of every business. Profits are primary and therefore on every businessperson's front burner. Value, on the other hand, is an elusive and intangible issue. Unlike communal business presidents, whose effectiveness is measured daily in their firm's share price, underground and house business presidents need not be concerned with their company's value as their shareholders, if any, typically focus upon profit only.
Value Measures the Size of Your Pile
Shareholders of communal fellowships part their wealth (or the size of their pile) using share value not income per share. Victorious Ceos, therefore, produce strategic plans for growth and profit that maximize shareholder's value. Mergers and Acquisitions is a fundamental element of most strategic plans to grow profits and value simultaneously.
What follows is an overview of communal business strategies to grow profits and value through acquisitions and how to adapt these strategies to underground and house businesses. Although the topic may seem technical and involved it is in fact quite basic and straightforward.
An Overview
Adding income or profits is self-explanatory. We will, therefore, focus primarily on the value component of growth through acquisitions.
We know a communal Company's Price/Earnings Ratio measures the number investors are willing to pay for of business income and that a P/E ratio of 15 for a well-run business is not unusual. Consequently, business Big with 100 million dollars of income and a P/E Ratio of 15 has a value of 1.5 billion dollars. We also know underground business P/E Ratios are much lower than those of communal Companies.
Strategy #1 - accumulate fellowships with a smaller P/E ratio than yours
Example:
The Transaction -- business Big with a P/E Ratio of 15 acquires business Smaller and pays 10 times income (P/E ratio = 10). business Smaller's 10 million dollar of income are added to those of business Big.
Increases in Value Calculation -- Smaller's income are now worth 15X instead of 10 times income resulting in an immediate growth in value of 5X income or ,000,000 (5 times ,000,000) over and above the value paid by business Big.
Strategy #2 - cut expenses through economies of scale
The picture gets even better if eliminating duplications and other economies of scale will cut business Smaller's expenses. Every dollar reduction in expenses translates into of value (P/E Ratio of 15 X ).
Increases in Value Calculation -- business Big is able to eliminate 1 million dollars of redundant price - ,000,000 X 15 = million dollar growth in value.
Strategy #3 - accumulate agreeing to a strategic plan
Bigs acquisition of a business in order to gain exact benefits such as: rights products, technology, channels of distribution or talent base for example, can result in an improved outlook for business Big. Whereas the P/E ratio usually reflects expectations of future profits, a strategic acquisition often produces a P/E ratio increase. In this example business Big's P/E ratio increases by a dollar from 15X to 16 times income after the acquisition was announced.
Increases in Value Calculation -- Every point growth in business Big's P/E ratio equates to 111 million dollars of added value (original 0 million in income plus addition of Smaller's million plus million in reduced expenses times 1).
Calculation of Increased Value to Shareholders:
In the above example, business Big's acquisition of business Smaller not only has increased income by million but has growth business Big's value as follows.
Increased value of million in earnings $ 50,000,000
Reduced Smaller's expenses by million 15,000,000
Increase of Big's P/E Ratio from 15 to 16 111,000,000
Total growth in Size of Pile (Value) 6,000,000
This Ceo has made the kind of a deal that makes shareholders happy.
No wonder there is so much M&A activity in the marketplace. A well conceived acquisition should furnish wondrous results. These dynamics are not reserved exclusively for communal Companies. underground and house businesses can and should take advantage of the opportunities presented by growth through acquisitions. We will now apply these ideas to smaller businesses and analyze the results.
Value building Strategies for
Small and Middle market Businesses
Private fellowships can employ the same three strategies used in the above communal business example given an insight of a few basic principles.
General Principles:
Financial
Small fellowships generally have small P/E ratios. P/E ratios growth as fellowships grow and produce structure. P/E ratios growth as dependency upon owner decrease.
Valuation Principles
Two major value determiners are:
Perception of risk and
Expectation of future profit
Businesses with essentially selfsame earnings, therefore, can have widely diverse values
"Round Ball" Principle - Non Financial
None of us are equally talented in all directions. We are not round balls, footballs or Frisbees perhaps, but no one can "do it all" well. business strengths and weaknesses will therefore generally mirror those of its owner.
Armed with a basic insight of the ground rules we can begin to formulate a strategic plan to grow and build wealth through acquisitions. Table A summarizes P/E ratios, level of earnings, definition of income and management style by business size. We can use Table A as reference as we produce our plan.
Table A
P/E Ratio Usual level of Earnings
and Definition of Earnings Type of Management
Wall Street 15X to
Omg* Typically measured in millions
Definition of Earnings: After Tax
* Oh My God
Professional management with many levels of responsibility. - Management's objective is to maximize profits and value to satisfy stockholder demands.
Middle
Market 3 to 15X
0.000 to small millions
Definition of Earnings: Pre/after tax and assorted Ebits unless the business represents a unique opportunity, (proprietary product, technology, channels of distribution, talent base etc.), the all cash, high manifold Wall road price is unattainable. Otherwise, dynamics found when selling Upper Main road apply. Segmentation of responsibilities and management buildings well defined. Owner may or may not be involved in operations to a primary degree.
Upper Main
Street 3 to 7X
More than 0,000 but less than 0,000
Definition of Earnings:
Adjusted Ebit ~ income Before Interest, Taxes plus Depreciation
and Adjustments (less an
Appropriate Manager's salary)
Owner still major element of company's success. Levels of responsibilities and management buildings are evolving.
Main Street 1 to 4X
Typically 100K, more or less
Definition of Earnings:
Discretionary income - Dollars available for: new owner's
compensation, acquisition debt
service, actual depreciation
reserves and return on invested
capital. Owner is vital to operations. "Wears all the hats" - petite to no management depth.
Develop your Plan
The plan should begin with an honest estimation of your company's strengths, weaknesses and the opportunities your business and industry represent. picture a bell curve representing your company's power and weaknesses. The top of the curve represents what has gotten you where you are. The outer extremes recount areas of opportunity. Your ideal acquisition should be a firm whose bell curve is the inverse of yours and by acquisition, both fellowships benefit.
Example:
Your areas of power are:
Quality workmanship,
On time delivery,
Good management with
Excellent systems and controls plus,
A loyal buyer base.
Areas of occasion are:
Need potential sales force,
Additional capabilities along with
Competent personnel and
Access to new buyer base.
Assume for this example that you own a Printing business with yearly revenues of 10 million dollars. Your specialty is high speed black and white 81/2 X 11 with some spot color. You furnish manuals and provide forms management services for the computer industry and others however you serve predominantly high tech companies.
You produce a plan to accumulate a smaller printer with a potential sales and work force serving a wholly distinct buyer base. You rule the business should provide the color and descriptive produce capabilities your firm lacks and the business should recount occasion for improvement through upgraded systems, controls and stronger management.
Further Define and Search
Online and other computer databases make finding your acquisition easier than ever. supplementary quest criteria usually includes:
Geographic area
Number of employees
Annual sales or revenues
Specific Sic # for type business sought
Single or manifold locations
Once your list of possible acquisitions is completed the fun part of mailing, calling, visiting and touring, negotiating and finally completing the transaction can begin. You can endeavor doing the job yourself or you can engage professional intermediaries to act as your in house M&A department.
The Transaction and the Benefit
You had your firm valued prior to the acquisition and considered a value of ,500,000 (P/E ratio of 7.5 with an Adjusted Ebit of ,000,000) -- Size of your pile = ,500,000.
You accumulate a firm that fits your criteria with million in revenues and an Adjusted Ebit of 0,000. You pay 4 times Adjusted Ebit or ,600,000. After the acquisition the combined firms produce a P/E manifold of 10 or a combined value of 15,000,000 (Earnings of 1,000,000 + 500,000 or 1,500,000 X 10). Improved systems and controls plus elimination of redundant expenses increased income 100,000.
Calculate Increased in Size of Pile (Value)
In the above example, the acquisition not only has increased income by 0,000 but has growth the combined company's value as follows.
Value
New manifold of 10 X combined income of ,600,00 16,000,000
Old Value of 7.5Mm plus Acquisition Value of 1.6Mm - 9,100,000
Total growth in Size of Pile (Value) ,900,000
Improvements in management, capabilities, sales force and buyer base plus the potential to cross sell printing should supplementary enable the combined business to growth sales, profits and value even further.
Do It Again
Management determines that if all of the mailing and fulfillment jobs Combined business now farms out (about 0,000/yr) are brought in house, income would growth and supplementary customers attracted to Combined business for the same reasons mentioned above. A small mailing aid with 0,000 in income and 0,000 in income is purchased for 0,000 or a P/E ratio of 3. management calculates income to growth from 0,000 to 215,000 with the addition of their 0,000 of volume and small economies of scale.
Management calculates an growth in value of the 0,000 purchase as follows:
Purchased income @ 0,000 plus
Added income of ,000 from work previously outsourced
Produces 5,000 in income to be added to Combined business earnings
Multiplied by Combined fellowships P/E ratio of 10
Produces a new Value of (5,000 X 10) ,150,000
This acquisition added 5,000 in income but produces an growth in the size of the pile (value) by ,400,000 to a new value of ,150,000.
Summary
Let's part the height of the pile after applying these growth through Acquisition principles.
Value of former business ,500,000
Price paid for first acquisition 1,600,000
Benefit of first acquisition 6,900,000
Price paid second acquisition 750,000
Benefit of second acquisition 1,400,000
Total Pile (Value) ,150,000
You may be wondering how long would it take to achieve these results.- less than a year with professional help. Do not be discouraged because your business is not generating 10 million in revenues. The ideas we have outlined work regardless of the present size of your business although the larger you are the easier it is to achieve dramatic results.
Perhaps you are one of the thousands of "Baby Boomers" who in some years will be at the usual resignation age. You have built a fine business and perhaps the belief of maybe selling it someday is distasteful. Maybe it would be fun to take a page out of the communal business Ceo's playbook. Focus on value and grow your business so you can leave in style with a pile.
No comments:
Post a Comment