To Buy or Not to Buy? That Is the Question.

While economies wax and wane, billions of dollars change hands annually in mergers and acquisitions — even in down years. The right acquisition can be a great way to grow a business, so if one of these deals comes your way, it’s important to carefully consider both the pros and cons — and even the risk of fraud.

What are the possibilities?

Merging with or acquiring another company is one of the best ways to grow rapidly. You might be able to significantly boost revenue, literally overnight. Achieving a comparable rate of growth organically, by increasing sales or adding new product and service lines — can take years.

An acquisition might also enable your company to expand into new regions and new customer segments more quickly and easily. You can expand in a horizontal acquisition (acquiring another company that’s similar to yours) or a vertical acquisition (acquiring another company along your supply chain).

In addition, acquiring the right complementary business can create synergies, enabling more efficient production or new capabilities that expand your company’s market or its appeal. With the right target, the new combined entity will be stronger than either business would have been on its own.

What are the drawbacks?

Although there are many potential benefits to acquiring another business, there are some potential drawbacks as well. For example, completing an acquisition is a costly process, both in money and time.

Therefore, you should determine how much the transaction will cost and how it will be financed before beginning the M&A process. Try to get an idea of how much time you and your key managers will have to spend on M&A-related tasks in the coming months; will those added responsibilities affect your existing operations?

Consider, too, a potential loss of control. Depending on the deal’s structure, some degree of control may have to be shared with the owners of the business you’re acquiring, especially if the owners aren’t retiring but intend to be actively involved with the merged entity.

It’s also critical to ensure that the two merging cultures will be compatible. Mismatched corporate cultures have caused numerous mergers to fail, including some high-profile ones. For instance, if one company has a formal, buttoned-down culture, while the other is more casual and laid back, conflicts will emerge unless you plan carefully how to blend the two divergent cultures.

Do your homework

The best way to reduce the risk involved in buying another business is to perform solid due diligence on your acquisition target. Your objective should be to confirm claims made by the seller about the company regarding its financial condition, clients, contracts, employees and management team.

The most important step in M&A due diligence is a careful examination of the company’s financial statements — specifically, the income statement, cash flow statement and balance sheet. Also scrutinize the existing client base and client contracts, because projected future earnings and cash flow will largely hinge on these.

Finally, try to get a good feel for the knowledge, skills and experience possessed by the company’s employees and key managers. In some circumstances, you might consider offering key executives ownership shares if they’ll commit to staying with the company for a certain length of time after the merger.

Plan for success

An acquisition can be a quick, efficient way to expand and grow your company. But be sure to map your course thoroughly before heading down the M&A road. If you’d like to find out more about the rewards and perils of these transactions, visit weaver.com or contact us for a consultation.

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