Thinking Acquisition? Analyze the Risks Versus Rewards
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Lenders are seeing an uptick in loan requests as the pandemic slows. Requests related to mergers and acquisitions are on the rise. It’s a good time for acquisitions for many reasons. Before approaching a lender, carefully consider the risks versus rewards.
For business owners, such as certified public accountants, registered investment advisors and insurance agents, their company often provides a significant source of income. These professionals along with many other owners in the community have worked hard to build a sustainable business. As the pandemic begins to slow and 2022 business strategies are being derived, many owners are looking to achieve growth by expanding through acquisition.
Now may be the ideal time to move forward because many company owners are showing an interest in being acquired. Several factors are fueling the 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. And still others are ready to retire due to the stresses of the pandemic.
Their desire to move out of the business creates opportunities for companies eager to make their first acquisition. With our specialty in lending to certified public accountants, registered investment advisors and insurance agents, our lending teams are hearing from business owners about their desire to acquire to support their strategic business objectives in the New Year. Here are several aspects to carefully consider in an acquisition strategy:
- 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 a larger business size to increase negotiating strength with service providers. An acquisition also reduces the number of competitors in the marketplace.
- Staff efficiencies. If your current team takes over servicing the acquired business client base, the newly merged company cash flow may have additional revenue without added staff expenses. And, if the company being acquired has high-performing staff, this increases the strength of the organization without going through the process of recruiting and hiring, which is proving to be very challenging in the current business climate.
- Stronger reputation. As a larger organization, the business can gain increased status and value among clients and prospects. The purchased organization may have complementary service lines and business or expertise, bringing added customer value.
- Greater diversification. The larger a business becomes, the more stable it can be. An acquisition can offer an effective way to diversify business. The acquired company may have distribution channels or markets that will increase an organization’s reach and expand the overall client base, reducing business risk.
- Staff development. Perhaps you’ve built a great team, and some professionals are ready to make a move into management. An acquisition can offer increased income that in turn supports staff career advancement. As business grows, having a trusted management team gives owners more time to run the business with a balance of time to enjoy life with family and friends. Good employees want to be challenged, and an acquisition can offer new projects and initiatives.
- Expanding market share. Maybe your business has gotten customer requests to open an office in another community, or you may identify a gap in the market for the services you offer. If there’s demand for business in other communities, it may be worth investigating an acquisition instead of opening another office. This expands the business footprint and increases overall market share.
- Duplicate success. The people inside a business drive success, which can be hard to duplicate. Maybe you’ve got a great salesperson on staff or have a savvy marketer who has helped build a strong business reputation. Finding a business with similar success and staff allows a business owner to duplicate a profitable business without the employment challenge.
Before speaking with a lender, consider how much business risk you’re willing to assume within the factors outlined above. Be honest with yourself about how much risk is too much risk. A well thought-out and planned acquisition can be rewarding not only to an owner but also the entire staff.
Rick Dennen is the founder, president & CEO of Indianapolis-based Oak Street Funding, a First Financial Bank company with customized loan products and services for specialty lines of business including certified public accountants, registered investment advisors and insurance agents nationwide.