Using M&A Techniques to Create Growth, Wealth and Liquidity

“M&A” for the Business Owner:   Using Merger & Acquisition (M&A) Techniques to create Growth, Wealth and Liquidity
Thomas McCoy

“M&A” is a term that refers to the techniques used by financial professionals to help business owners create wealth and liquidity.

In general, there are seven basic techniques:

  1. Improve Performance
  2. Acquisition (Buy/Merge)
  3. Recapitalize
  4. Secure Funding
  5. Divestiture (Sell)
  6. Create alliance
  7. Take public

The best way to understand how to use these techniques is to look at an example.

Here’s Ed. He owns a business that has revenue of $5 million and a market value of $1.5 million. The business has been the focus of his attention for 12 years. He’s had his ups and downs, but, for the most part, the business has shown slow, steady growth.

Ed’s a baby boomer and he’s reached the point where he’s beginning to think of the next stage of his life. He’d like to reduce his involvement in the business and enjoy some of the gains of his hard work. His business is his primary source of wealth and he’s at the point where he would like to reduce some of his risk and take some chips off the table.

However, he still wants to be engaged in the business and still wants it to keep building wealth because a market value of $1.5 million does not provide him enough on which to retire.

How can Ed accomplish all his objectives? By working with an M&A professional to develop the right strategy and assist with the implementation. In Ed’s example, the strategy looks like this:

  1. Diversify his net worth
  2. Harvest cash from the business while retaining control
  3. Use a partner to grow the business

Technique #1: Improve Efficiency

As every good business owner knows, there are four primary profit drivers: Gross Margin, Expenses, Accounts Receivable and Inventory. With the right type of advice, over a period of 6 months, Ed was able to increase his Gross Profit by 2%, reduce his expenses by 1.5%, increase inventory turns by 1 turn and reduce accounts receivable by 10 days. This increased annual earnings by $175,000 and improved cash flow by $347,000. With the increase in earnings, Ed’s company is now worth $2,362,000.

Technique #2: Acquisition

Over a period of 9 months, Ed proceeded to purchase a competitor of the same size. Because Ed’s operation was streamlined and efficient, he was able to absorb the additional business without increasing expenses (economies of scale.) The result was a $10 million company with earnings of $2 million and a market value of over $9 million.

Technique #3 Recapitalization

Ed was now ready to reduce his risk and take some chips off the table. With a value of over $9 million and with the earnings to support the debt, Ed was able to leverage the company with over $6.6 million of debt (without a personal guarantee.) Then he sold 33% of the available equity to a financial partner for $888,000. Total cash out to Ed was over $7.5 million plus 67% of the company (value $1.7 million.)

Technique #2 (again): Acquisition

By this time, Ed was feeling secure and knowledgeable. He had implemented several successful M&A techniques and had a financial partner who would support the next big move…a $10 million acquisition. His M&A intermediary took almost a year to find an acquisition that was a good match. During that time Ed kept a strong emphasis on operating efficiency and, as a result, he was able to absorb the additional business with only a minimal increase in operating expenses. The result was a $20 million company with earnings of over $5.2 million and a market value of over $23 million…67% of which was Ed’s ($15,728,000).

In a little over three year, Ed took his company from $5 million in sales to $20 million and his portion of the company value from $1.5 million to $15 million…and pocketed almost $7.5 million in the process. This is something he never could have accomplished doing business-as-usual.

M&A techniques are a powerful resource to create transaction-based liquidity and wealth events for business owners. It is well worth the time to learn how to make them work for you.