Do you think Acquisition? Analyze risks versus rewards
Lenders see an increase in loan applications as the pandemic slows. Requests related to mergers and acquisitions are increasing. This is a good time for acquisitions for many reasons. Before approaching a lender, carefully consider the risks versus the benefits.
For business owners, such as chartered accountants, registered investment advisers, and insurance agents, their businesses are often 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 developed, many owners are looking to achieve growth by expanding through acquisition.
Perhaps now is a great time to move forward as many business owners are showing an interest in being acquired. Several factors are fueling the trend. Some long-time owners have reached or are approaching retirement age, and they are ready to retire. Others are weary of the growing compliance and licensing burdens that prevent them from serving customers or the uncertainty of government regulations. And still others are poised to retire due to the stress of the pandemic.
Their desire to leave the company creates opportunities for companies wishing to make their first acquisition. With our specialty in lending to Certified Public Accountants, Registered Investment Advisors and Insurance Agents, our lending teams listen to business owners on their desire to acquire to support their strategic business goals. in the new year. Here are several aspects to consider carefully in an acquisition strategy:
- Economies of scale. One of the key benefits of an acquisition is the ability to spread a large portion of your operating costs over more income. For example, you may be able to get more impact from your marketing investment and use a larger company to increase your negotiating strength with service providers. An acquisition also reduces the number of competitors in the market.
- Staff efficiency. If your current team supports acquired business customers, the cash flow of the new merged company can generate additional income without additional personnel costs. And, if the acquiree has a high performing workforce, it increases the strength of the organization bypassing the recruiting and hiring process, which is proving very difficult in today’s business climate.
- A stronger reputation. As a larger organization, the business can gain increased status and value from customers and prospects. The purchased organization may have complementary service lines and activities or expertise, bringing added value to the customer.
- Greater diversification. The more a business grows, the more stable it can be. An acquisition can offer an effective way to diversify the business. The acquired business may have distribution channels or markets that will increase the reach of an organization and expand the overall customer base, thereby reducing business risk.
- Staff development. You might have made a great team and there are some pros who are ready to move on to management. An acquisition can offer increased income which in turn supports the career advancement of staff. As the 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.
- Increase in market share. Perhaps your business has received requests from clients to open an office in another community, or you can identify a gap in the market for the services you offer. If there is a demand for business in other communities, it may be useful to investigate an acquisition instead of opening another office. This widens the business footprint and increases the overall market share.
- Duplicate success. The people inside a business lead to success, which can be difficult to replicate. Perhaps you have a great salesperson on your team or a savvy marketer who has helped build a solid business reputation. Finding a business with similar success and staff allows a business owner to replicate a profitable business without the challenge of employment.
Before talking to a lender, think about how much business risk you are willing to take given 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 for an owner but also for all staff.
Rick Dennen is the Founder, President and CEO of Oak Street Funding, based in Indianapolis, a First Financial Bank company with loan products and services for specialized industries including chartered accountants, registered investment advisers and insurance agents nationwide.