2024 is the year for Mergers and Acquisitions (M&A). In fact, every group I’ve seen putting together conferences is talking about M&A as a tool for making an exit plan or growing your business. It’s the go-to strategy for companies looking to scale up, diversify, or even make a grand exit. 

So why is this happening? And why now? Quite a few things are happening in the post-pandemic economy—so let’s break it down. Baby boomers are approaching retirement age—and those who have spent decades building successful businesses are getting ready to pass the torch. But it’s not just about the boomers bowing out. There are plenty of business owners out there who started companies with the idea of selling and making a profitable exit. 

And there’s a third category—digital transformation. As industries—including accounting—evolve with new technologies and changing regulations, many business owners must decide whether now is a good time to join forces with another company, commit to modernization, or sell out and move on. 

So, why should you care? Opportunities are ripe for growing your business by acquiring another or using the opportunity to move on by selling your business. Then again, if you’re simply on a mission to understand what’s got your LinkedIn feed fired up, we can do that, too.

And because it’s such a hot topic right now, I wanted to take a few minutes to explore what it means for your business. 

 

Understanding M&A as a Growth Strategy

Most growth happens in two ways—organic growth (bootstrapping) and growth through acquisition.

Bootstrapping, or growing a business using its own revenue, is a slow and steady approach. It’s about building from the ground up, often with limited resources. And if you’re adding a location, you must hire and train new staff. My team and I see business owners going through this often, which presents challenges, especially in a time of fierce competition for hiring talent.

On the other hand, growth through acquisition offers a faster track. It allows companies to gain new capabilities quickly, enter new markets, and acquire new customer bases. It’s more expensive upfront and certainly comes with its own growing pains, but it offers considerable payoffs regarding rapid growth, scalability, and establishing new markets. 

 

Understanding the A of M&A: Acquisition

When clients come to us talking about buying another company, there are many things to consider. Yes, it can lead to hockey stick growth, but there are myriad financial, strategic, and operational considerations. Let’s dive into what it takes to make a successful acquisition.

How will you finance your acquisition?

One of the first things to consider is how you’ll finance the acquisition. A common approach is to take out a loan. But that money is costly right now at Prime + 3%. This means you’ll be paying the prime rate—the interest rate commercial banks charge their most creditworthy customers—plus an additional 3%. 

Your books must be in good shape if you’re considering financing, especially through Small Business Administration (SBA) loans. SBA due diligence is rigorous and for good reason. They’re assessing your ability to repay the loan and the financial health of the business you’re acquiring.

This is where having a finance pro as an extension of your team can set you up for success. 

 

Do you have resources and cash reserves? 

Beyond financing, you must ensure you have enough resources and cash reserves. Like a remodel, you often run into unforeseen expenses during acquisition or integration. Running out of cash mid-process can be disastrous. 

 

How to identify the “perfect fit” acquisition

Before looking at other companies, I recommend clarifying your strategic goals. Your CFO or controller can help you evaluate these goals and whether potential acquisitions fit them. Once you have a clear idea, start looking for companies with established knowledge, a solid customer base, and strong industry relationships. These elements can provide immediate value and a smoother transition, ensuring you have business as you integrate the two companies.

 

Plan ahead for compatibility.

Acquiring a business is more than a financial transaction. The company you’re buying has employees and a culture that takes work to integrate. So, it’s important to assess what needs to happen to merge the two cultures.

To that end, it’s also about tech and operational compatibility. Mismatched technologies can lead to integration nightmares, increased costs, and operational disruptions. Change doesn’t happen overnight, but the more closely aligned the two businesses, the lighter the lift.

 

Create a roadmap for integration.

You must have a detailed plan for integrating the two companies. Full stop. It should cover operations, culture, and technology—and how you’ll communicate changes and expectations to everyone. 

 

Don’t forget due diligence.

Due diligence is the cornerstone of any acquisition. It’s not optional and shouldn’t be rushed. It’s one of the places where your finance team will be essential because you’ll be examining your target company’s financials, legal matters, customer contracts, employee agreements, and more. 

 

Choosing a Company to Acquire

We’ve worked with several companies who have gone through both sides of the M&A process—as buyers and sellers. There are a few different strategies that work well.

One strategy is to choose acquisitions based on the synergy of similar companies. For example, if you’re strategically acquiring companies, you might pair a metal manufacturer with a roofing company. Alternatively, you might pair a tax prep office with a bookkeeping firm.

Another strategy is to grow by moving into new markets. While opening a new office in a new market is possible, that takes time and energy. On the other hand, if you’re looking to establish a new client base in a new area by purchasing a company that’s already successful in the new city, you can take advantage of their domain expertise and existing relationships.

The common thread is strategic growth.

 

Preparing to Buy a Business

As you’ve seen, your approach should be meticulous, strategic, and intentional when you’re on the buying side of a business acquisition. It’s not just about finding a business to buy. It’s about finding the right business. If you’re engaging a broker to guide you through the process, help with negotiations, or ensure thorough due diligence, remember one thing—the final decision is yours. With that in mind, it’s a good idea to understand what you’re getting into.

Here’s what you should know:

  • Define your goals. Are you looking to enter a new market, acquire new technology, or obtain a skilled workforce? Being clear about your objectives will guide you in selecting a business that aligns with your strategic goals.
  • Assess your resources. As I touched on earlier, this goes beyond the purchase price. Ensure you clearly understand your financial capacity and the resources at your disposal for a smooth transition.
  • Ask specific questions about the existing workforce. While you can’t ask for names or other personally identifiable information, you can ask questions to understand your current company’s team and operational fit. Ask things like:
    • What are the salary structures, benefits, and profit-sharing expenses?
    • What roles do employees play, and where are they located? 
    • Are they open to travel?
    • What are their qualifications and certifications? 
  • Analyze the business with the help of attorneys, brokers, and finance pros. Understand how many existing customer relationships are likely to continue and the business’s legal standing, financial health, and operational efficiencies.
  • Create a checklist of essential documents and information. This should include a balance sheet, a detailed list of assets and liabilities, and workforce information.

 

Preparing to Sell Your Business

Regarding M&A, the other side of the equation involves selling your business. And if this is on your 6-12 month radar, then it’s a good idea to work with finance pros like our team to prepare for the sale. That time frame lets you organize your finances and operations and make your business more attractive to buyers. 

Here’s what you need to know:

  • Understand your potential buyers. This allows you to take appropriate action in your business beforehand, including marketing, operations, and finances. Having your ducks in a row may give you better negotiating power and terms.
  • Decide what role you want moving forward. Are you planning on a total exit? Or do you want to stick around in an advisory role? This will affect the sale terms and the transition plan.
  • Understand the implications of cash deals and financed deals. Cash deals are often straightforward. Financed deals involve more complexities, due diligence, and a thorough examination of your business.
  • Get your books in order. Tight balance sheets and transparent financial records reduce any red or yellow flags in your business that could derail the deal.
  • Be ready for information requests. Your buyers may request more information than you expect. Because our team knows our clients’ businesses inside and out, we can quickly and easily turn around these requests if our clients get asked for additional information.

 

Deciding on Mergers or Organic Growth

If you’re growing your business, you have a decision to make. Do you want to grow via M&A or grow organically? There’s no wrong answer— both come with pros and challenges.

Organic growth relies on your existing resources and capabilities and is usually a slower—albeit less risky—path. Consider your goals in evaluating if this is the right choice for you. And, if growth involves investing in new product development, marketing strategies, or entering new markets, what will that cost, and do you have the necessary capital?

On the other hand, acquisition involves buying an existing business to increase your market share, capabilities, or geographic presence, as we’ve examined today.

Deciding between organic growth and acquisition depends on various factors, including business goals, market conditions, financial health, and risk tolerance. Whether you choose organic growth or acquisition, the key is to have a clear, well-thought-out strategy that aligns with your long-term business objectives—and exceptional financial records. 

In addition to bookkeeping services, Automated Accounting Services provides outsourced CFO and controller services, operating in an advisory capacity to our customers, including those ready to buy or sell through M&A. Contact us today to find out how we can help.