Don’t Let a Good Recession Pass You By
The news in the world of small business is not terribly good.
 
Although the recession has created a spurt of people starting a business, failures are increasing, investment deal flow dollars are decreasing, and pessimism about the future is at an all time high. Consider, for example, that nationally, small business bankruptcy filings increased from 19,700 in 2006 to 43,500 in 2008. Or that the NFIB Small Business Optimism Index went from 98.9 in 2006 to 81 in March 2009. Further, in a recent study conducted in March 2009, only 1% of small businesses thought it was a good time to expand on their own.

While some small business owners may be wringing their hands or taking a defensive position in order to protect their business and personal assets, others see the economic downturn as a once in a lifetime opportunity to catapult their business to new heights through a merger or by acquiring another firm. Too many, this strategy might be considered counterintuitive to what should be done in a recession, but to others, a merger or acquisition at this time can be exactly the right move.
 
So, why should a small business owner consider a merger or acquisition, and why now? The “why now” is the easy part: distressed owners are looking for a way out and are selling their business and its assets at fire sale prices. Just like the stock market where investors are coming back in droves to take advantage of historically low stock prices, aggressive and entrepreneurial small business owners should be looking to buy other businesses, now.
 
A merger or acquisition can deliver a host of benefits to the small business owner seeking to buy another business. Through recent merger and acquisition activity, we have helped small business capitalize upon the downturn and achieve outcomes like:
 
· Expanding their base of customers
· Improving their geographic footprint
· Eliminating competition
· Growing their distribution channels
· Acquiring new talent
· Providing new opportunities for management
· Creating synergies and opportunities for vertical integration
· Signaling the market that they are a strong and viable business
 
A word of caution: this is not a strategy for the faint of heart! There are many risks involved, but with proper planning, support and (of course) financing, the time to pluck that low hanging fruit is at hand. To get there, consider the following seven action items as fundamental to your success:
 
(1)   Know Your Objectives
 
Even though opportunities abound, a fundamental question needs to be asked and answered before initiating the M&A process – what are we trying to achieve through this effort? The answer to this question is going to drive your strategy, planning, targeting and financing options, and a host of other financial, operational and strategic considerations. Are you looking out take out a competitor? Expand into a new territory? Pick up a new way to distribute your products or services? Think this through very carefully as your response will serve as a compass for keeping you on the right path.
 
(2)   Get Lean, Mean and Prepared for Action
 
Like preparing for a championship event, the small business owner considering a merger or acquisition first needs to get in shape. Profitability needs to be maximized by cutting costs; cash positions need to be strengthened; debt should be paid down; marketing efforts and resources need to be maintained; and in general, the small business owners needs to get their own strategic, financial and operational house in order before taking on what can become a herculean task. There are two major objectives for getting lean and mean – having financial metrics that increase your marketability to funding sources, and creating an organization that can be nimble and quick to capitalize upon opportunities.
 
(3)   Surround Yourself with a Team of Trusted, Professional Advisors
 
It is critical that you have the right team in place to help you through the M&A process, including your CPA, banker, and attorney. Your team needs to bring a wide range of skills experience, and expertise to the table including prowess in valuations, due diligence, negotiations, obtaining financing, deal structure and flow, and post M&A planning and implementation. Your team is not the place to skimp on money, for their experience can mean the difference between an unproductive and unrewarding effort, or one that meets all of your objectives including the quickest possible ROI on the investment you will be making.
 
(4)   Find Targets
 
There are many ways to find an M&A target, from business brokers to taking a hard look at your competition, but again, your target needs to be a function of your objectives. Size, location, reputation and other attributes will play a key role in your targeting process. I strongly recommend that you seek targets of opportunity from your team of advisors, as it is likely that they have knowledge of firms that might be in the strategic and financial wheelhouse of your opportunity.
 
(5)   Due Diligence
 
You and your management team, and your CPA (most likely) need to work extremely hard to ensure that what you want to buy is what you will be getting. Due diligence is the process of conducting a thorough, methodical and unemotional analysis of the target company. It will cover many different aspects and intricate details, from financial metrics to assessing the skills and talents of employees you may be acquiring. The team of professionals you work with will have a detailed checklist and process for the due diligence step, but I always like to include a Strength/Weakness/Opportunity/Threat (SWOT) analysis as part of the process, as it helps us to move beyond numbers to looking at competitive and market positioning.
 
(6)   Get the Money
 
Now you have objectives, a team, and a target. You’re lean and mean, you’ve completed due diligence, and it appears that a deal is in the works. Now, it’s time to get the money. There are many different sources to help you capitalize a merger or acquisition, from angels to investment bankers. However, my recommendation is to first go to your banker, as regardless of what you may be hearing in the news, they do have money to lend. If you have accomplished what I have recommended in this article, your chances of getting bank financing should be reasonable.
 
(7)   Develop and Execute an Implementation Plan
 
As much work as may have been done pre- merger or acquisition, many ventures fail due to lack of post M&A planning and management. Bringing two organizations together is no easy task. From financial systems to customer relations, and from policies to processes, a significant amount of thinking and planning needs to be established in order to realize the full benefits of the M&A as soon as possible. Check with your professional team, as it is likely that they have implementation and management plan models that can be adapted to your situation.
 
I believe that the recession is not going to be kind to many small and personal businesses in 2009 and 2010. Failures will increase and many surviving small businesses will see their revenue and income decline. While this will certainly be a challenge for many small businesses, others will see these conditions as signposts of opportunity.
 
The American author Charles Swindoll once wrote, “We are all faced with a series of great opportunities brilliantly disguised as impossible situations”.
 
Take heed, for today’s impossible situation may very well be your great opportunity of tomorrow.
 
Written by: Bruce Zicari, CPA, Leader of The Bonadio Groups Small Business Advisory Group

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