The “Urge to Merge”

The following article originally appeared in the February 2009 edition of The Myers Report newsletter published by the firm.

The “Urge to Merge” – Part II

By Jane M. Myers, Esq.

What should a business owner think about first in order to put the sale or merger process in motion?

First, identify and clarify your goals.

What is the outcome you are looking to achieve from the sale/merger?

To clarify your goals consider these issues:

Is the market for your services saturated in your present locale?

Expansion of the firm’s geographic reach could make great business sense in today’s economy – if there’s no more gold to be mined in your neighborhood, get up and go where the gold is! (For licensed professionals, be aware of licensing requirements in other states before providing services there.)

Are you seeking to acquire a new area of expertise?

Listen to your clients…are you able to provide the services they need? Or, are you repeatedly turning away the same type of work?

Is expanding your client base the goal of the merger?

Do you attract business opportunities but get increasingly frustrated because you don’t have the capability to provide the services?

Will there be a substantial gain of operational benefits with a reduction in overhead as a result of the sale/merger?

Does the firm you’re looking to integrate with have the latest technology already in place? Abundant office space? Will the sale/merger eliminate or reduce duplication of overhead?

Are you looking for an “exit” strategy for the company’s principals?

Will the acquisition provide you with a way to “cash out” your equity in your firm? Will you be freed from the day-to-day administration headaches of running your firm? Will you be provided with an employment agreement with benefits, perks, and salary?

Take a look in the mirror.

Once you’ve identified your goals, ask yourself:

What’s my business worth? What’s a realistic sales price? If you’re interested in buying a business, how do you evaluate its worth?

There are some well-known factors involved in the valuation of a business, including the value of the company’s contracts, jobs or backlog of business “in the pipeline” and the value of the goodwill that may be associated with a particular business name or location. But, there are less obvious factors to consider as well.

(i) A company that has a proven system for generating business and doing the work will often have more value than a company whose success is tied largely to the talents or contacts of particular principals or key employees – unless those principals or key employees will continue to be employees or consultants following the merger or acquisition.

(ii) Consideration of prevailing economic conditions is also important. As an example, the expected surge in infrastructure spending may place a premium on engineering firms whose practices focus in areas such as civil engineering, transportation and traffic studies, environmental assessment and public works projects.

(iii) How the purchase price will be paid can be another factor. In some cases, the principals of a company that’s being acquired might be willing to accept a lower purchase price in exchange for the security of receiving a lump sum payment at closing as opposed to the risk of collecting a series of payments over time.