Getting your small-scale deal right

Size does matter. Mergers between small-capitalized, privately held companies are different animals from larger-cap and public company combinations. Small deals can run more smoothly than large ones, but they also can get bogged down in issues that neither party could ever foresee.

The key to success is preparation, particularly if you’re a business seller with no prior M&A experience. Because small, private companies have fewer reporting requirements and dedicated staff than their larger public counterparts, financial and operating information — and the quality of that information — can become a major stumbling block.

Will small get bigger?

Middle-market companies that have been waiting out the recession may still be sitting on substantial cash piles, and, at some point, will have to start spending to grow. Their strategies are likely to include acquisitions.

Too little information

For many companies, getting bank financing is the biggest obstacle to buying a business. Thus, buyers with adequate cash have a big advantage. The problem for companies that are ready to buy may be finding quality information about potential acquisition targets.

This situation is especially common when buyers approach small businesses that aren’t on the market and may not have considered selling. Even if potential sellers are interested in making a deal, they might not have the historical financial data and other documentation that buyers need to make a reasonable offer.

Companies that want to sell, therefore, can greatly benefit from the help of experienced advisors to prepare financials, fill in any record-keeping gaps and reduce risks. In particular, sellers should:

  • verify and double-check all reported income — especially if revenue has been deferred or expenses pushed forward to reduce annual tax liabilities.
  • strengthen any weak or missing documentation regarding key intangible assets, including patents, licenses, employee contracts and proprietary software.
  • review and fortify internal controls, standardizing any operations that have formerly been provisional.

Even if a business is selling to a private-company buyer, that buyer is likely to scrutinize the seller during the due diligence stage to avoid potential post-deal surprises.

Preparing financial statements also enables a seller to spot opportunities for improvement — potentially increasing the company’s sale price. For example, owners might want to sell some non-core assets and use the cash to reduce debt.

Buyers need help, too

Small-cap sellers aren’t the only ones that need help getting in shape. Buyers, particularly first-time buyers, are vulnerable to errors, and it’s possible they won’t recognize danger signs when they see them.

Every company making an acquisition should work with M&A advisors — especially during due diligence. Aside from reviewing financial statements, advisors can help buyers assess the value of tangible and intangible assets, including whether the seller owns the intellectual property it claims it does. Advisors also can spot hidden costs. For example, many inexperienced buyers don’t realize how difficult it can be to dispose of real estate holdings, or how costly it can be to train newly merged employees or integrate IT systems.

While the greatest risk for buyers is to overestimate the value of a deal and pay too much, underestimating its value also can have negative consequences. If the selling owners believe they’re being low-balled, they may simply look for other suitors with a more realistic understanding of their company’s value.

Ignorance may be bliss

Ironically, private, small-company deals tend to be most successful when both buyers and sellers admit their relative ignorance. M&A transactions are complicated and require the expertise that most business owners simply don’t have. Even with small companies, details can fall through the cracks.

Whether you are looking to buy or sell, we would be happy to assist with your M&A transaction.

Learn more about KraftCPAs Transaction Advisory Services.

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