How Mergers and Acquisitions Benefit Small Businesses

After building your business from scratch and growing it for years, you might have hit the ceiling, but you’re not about to give up. The challenge to keep the company alive may lead you to try something new and explore opportunities you might not have considered before, such as selling your business.

As a founder or owner, you have the power and privilege to recognize that “what got you to where you are isn’t necessarily what will get you where you need to go,” says Dena Jalbert, founder and chief executive officer (CEO) of Align.

Now is an excellent time to look at options that can help your business scale beyond where it is today. For instance, merger and acquisition (M&A) proves to be a promising sales strategy for lower-middle-market organizations as more investors pursue companies with $10 million to $100 million annual revenue.

But how exactly does M&A benefit your business? Here’s what you need to know:

What are mergers and acquisitions?

First, let’s define merger and acquisition. There’s a small difference between the two, which are often interchanged or lumped together. According to Jalbert, an acquisition refers to one entity buying another and folding it into their organization. On the other hand, a merger pertains to two equals coming together to form another entity or co-branded company.

We talk about acquisitions when we mention M&As in this blog.

How mergers and acquisitions benefit smaller businesses

1. Receive more rewarding financial returns

Transitioning your business through M&A provides you with an option to sell to a strategic buyer or a private equity (PE) firm. These common alternatives enable you to enhance the price you receive for your company.

A strategic buyer acquires the entirety of your business, letting you cash in and retire or focus on other priorities in life. With proper planning and timing, you can negotiate a higher valuation, allowing you to enjoy financial security as you move on to the next chapter of your story.

Meanwhile, you can also continue to create generational wealth by selling a portion of your business to a PE group. You keep investing, stay involved in running the company, and work with the majority owner to generate increased value. Then, you liquidate your equity at a potentially larger amount in the second sale of the business – an event described as taking a second bite of the apple.

2. Amplify your ability to scale

M&A can give you access to additional resources you would otherwise access at a much later date, say if you choose to expand internally. While an M&A deal usually benefits the acquirer through improved production capability at a lower cost, your business can also take advantage of raised capital.

Jalbert alludes to the new opportunities you can cultivate for your staff and colleagues as a $30-million company that isn’t growing versus being absorbed into a $300-million enterprise. Of course, on the flip side, you lose some of your autonomy and decision-making rights. But having more capital also makes it easier for you to get whatever you need to drive business success.

Further, deeper pockets can open doors to markets you haven’t reached before. A larger marketing budget can help you tap into a wider audience and broaden your customer base.

3. Limit the losses you incur

Last but not least, de-risking the business from the owner is another significant benefit of the M&A strategy. Mentioning this point is timely given the impact of Covid-19 on small business operations and outcomes. Lower-middle-market entrepreneurs have dealt with challenges including temporary closures, supply chain disruptions, and employee illness.

After a single 100 percent sale or during post-close integration, the acquirer accounts for the primary responsibilities, pandemic-related or not. Meaning the M&A transaction removes the burden of stress from previous owners. No wonder Align clients would often let out a big exhale on closing day.

How to fully enjoy merger and acquisition benefits

Meeting certain conditions and accepting some tradeoffs are part of deal making. Embracing what is to come paves the way for you to fully enjoy the benefits that await on the other side of selling your business. So, here are a few tips on preparing yourself and your people for the acquisition route:

• Be emotionally ready. Entrepreneurs start a business because they don’t want to work for someone else. Think about how selling your company would spur growth while reverting you to being an employee, even if you end up in a 51/49 partnership.
• Keep your eye on the prize. Most founders or owners who sell their business to a PE firm accept the tradeoff by focusing on the future financial reward. One of Align’s clients is a classic example of this paradigm shift. The client sold their business, tripling its size, but wasn’t initially happy about becoming an employee again. Now, the client understands that taking a second bite of the apple can lead to the ultimate return. You can be like this entrepreneur and consider the advantages. For instance, which is better: owning a 30% stake in a growing $300-million company or taking home 100% of a $50-million one?
• Know what you want. Ask yourself: “If you have to work for someone, what role do you want to have?” The cool part of an acquisition is that you can stick to the stuff you like. If you’re passionate about sales, someone else can take over the CEO seat while you take on a sales-focused role.
• Find the right fit. Searching for the right PE buyer is crucial since it’s essentially akin to getting married. We’re talking about two companies combining into one, so make sure your cultures don’t clash.
• Partner with a tried, tested, and trusted advisory firm. The acquisition process can be time-consuming and unstable. So, it would be best if you had someone who could represent you, understand your requirements, and uphold your best interest in negotiations.

When you partner with Align, you receive guidance on the optimal way to move forward. Where you have been and where you want to go matter to us. And because we have been there ourselves, we know how to equip and empower you as you tackle the M&A process one step at a time. Let our experts help you generate significant enterprise value and ensure you reach your future goals.

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