Is It Time to Make Your First Acquisition?
February 8, 2022 •Oak Street Funding
If you’ve grown your company to the point at which you’re contemplating making your first acquisition, congratulations! Reaching this milestone reflects your skills as a business owner and suggests you are successful at serving your clients.
It’s a good time for your first acquisition
You may be ready to buy, but is anyone prepared to sell? Now may be the ideal time to move forward because many small companies are showing an interest in being acquired. Several factors are fueling that trend. Some longtime owners are at or nearing retirement age, and they’re ready to exit. Others are weary of the increasing compliance and licensing burdens that distract them from serving clients or the uncertainty in government regulations.
Some may be at capacity and looking for ways to achieve scale by “partnering” with another likeminded company. Their desire to move out of the business or grow their business creates opportunities for companies eager to make their first acquisition.
What can a first acquisition accomplish?
You’ve grown a successful business, and a carefully planned acquisition can help your business achieve a variety of strategic objectives, including:
- Economies of scale. One of the essential benefits of an acquisition is the ability to spread many of your operating costs across more revenue. For example, you may be able to get more impact from your investment in marketing and use your larger size to increase your negotiating strength with service providers.
- Greater diversification and market share. The larger your business becomes, the more stable it can be. You may be getting requests from people to open an office in another community, or you may identify a gap in the market for the services you offer. The company you acquire may have distribution channels or markets that will increase your organization’s reach and expand your overall client base, helping you reduce business risk.
- Staff development. Perhaps you've built a great team, and some of them are ready to make a move into management. You can allow them to advance their careers as you boost your income. Driven employees like to be challenged, and acquisitions can take them out of their daily routines and provide them an opportunity to contribute in other ways – especially if you provide incentives.
Are you personally ready for growth?
Deciding to grow your business can be exciting and stressful. Before you decide, it’s wise to consider the potential negatives. The stress factor is an important one. If you already feel like there aren’t enough hours in the day or that you never get a chance to relax, this may not be the time to consider a growth strategy.
You may want to consult with experts who can help you through the acquisition process such as consultants, an attorney who does merger and acquisition work, capital partners, and accountants. You don’t want to sacrifice your long-term health and family relationships for short-term business gain.
What are the risks?
It’s important to consider how much business risk you’re willing to assume. Be honest with yourself about how much risk would be too much. Creating a thorough strategic business plan for your first acquisition will allow you to assess the potential risks and identify ways to reduce them.
Surprisingly, growth may cost you clients.
When businesses focus on development, they may lose sight of the importance of the service that’s created loyal clients and motivated employees. If clients sense a decline in service or quality, their loyalty may evaporate. Employees may feel neglected or left behind, especially if management is overly focused on the new operations or well-liked team members are moved to new locations.
That’s why it’s essential to involve employees in many aspects of developing your first acquisition strategy. Integration plans should be built to integrate the new team members and their client base to minimize loss from the acquisition.
Tax considerations for your first acquisition
Federal and state taxes are inherently complicated and determining how your first acquisition might affect your taxes demands some careful study by your CPA or other tax professional. The tax impact depends largely on how your business is legally structured (for example, whether it’s a sole proprietorship, partnership, or corporation), the structure of the business you’re buying, and how the combined company will be structured. For example, the rules are different for C-corporations and S-corporations.
Generally, tax questions for the acquirer focus on how the combined entities will be taxed going forward. Much of that depends upon how the businesses will be structured. As an example, if you plan to operate the company from a single office, you'll lose the expense deductions related to the acquired company's facilities. That's why your accounting advisor needs to prepare projections.
Funding your first acquisition
To realize your dreams of acquisition, you’ll probably have to assume additional debt. Most acquisitions will require some degree of outside funding because buyers lack sufficient capital or are unwilling to tie up a large portion of working capital. Consider the amount of risk you’re willing to assume and be sure your debt load doesn’t become overwhelming and put too much strain on the bottom line. How can the overall structure of payment to the seller align the best outcome for a successful post acquisition transition?
If you are thinking about growing your business using an acquisition strategy and don’t know exactly where to begin, please feel free to contact us. At Oak Street Funding, we have experts in lending who have helped hundreds of clients make their first acquisition a reality.
Disclaimer: Please note, Oak Street Funding does not provide legal or tax advice. This blog is for informational purposes only. It is not a statement of fact or recommendation, does not constitute an offer for a loan, professional or legal or tax advice or legal opinion and should not be used as a substitute for obtaining valuation services or professional, legal or tax advice.
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