Growth through acquisition should not be regarded as an option only for large or public enterprises. Small and medium businesses that can gain by acquiring other companies, instead of always decide to grow a new customer at a time, to benefits in addition to increased sales and profits.
Timing is Right - Two elements have combined to growth through acquisition an attractive option for small and medium enterprises.
Demography - the aging of the baby boom Generation, many of which are up their own businesses, to increase the number of owners ready to consider a sale to an historic high.
Financing - Money is for small and mid-market financing of acquisitions. Banks and non-traditional lenders are aggressively pursuing acquisition lending at a level that we have not seen in twenty years. Cash needed to make a deal is done in order to reach a historic low.
Profit pays the bills
Income and price are two main financial components of the individual> Company. Profits are essential, and therefore on the front burner is any carrier. Price, on the other side, an elusive and intangible issue. Unlike public company presidents, whose effectiveness is measured daily in shares of their company Value, private and family business presidents need not be concerned with the value of their company than the shareholders, if any, typically focus only on profit.
Value measures the size of your pile
Shareholders of listed companiesmeasure their wealth (or the size of their pile) using share value not earnings per share. Successful CEOs, therefore, develop strategic plans for growth and profit that maximize shareholder's value. Mergers and Acquisitions is a fundamental element of most strategic plans to grow profits and value simultaneously.
What follows is an overview of Public Company strategies to grow profits and value through acquisitions and how to adapt these strategies to private and family businesses. Although the topic may seem technical and complex it really is quite simple and straightforward.
An Overview
Adding income or profit is self-explanatory. We will therefore focus primarily on the value component of growth through acquisitions.
We know a Public Company's Price / earnings ratio measures the amount investors are willing to pay for $ 1 of corporate earnings and that a P / E of 15 is a well-run companies are not uncommon. Consequently, company BIG with 100 millionU.S. dollar gains and a P / E ratio of 15 has a value of 1.5 billion U.S. dollars. We also know private companies P / E ratio is much lower than those of public companies.
Strategy # 1 - You buy a smaller company with a P / E for sale
Example:
The Transaction - Company BIG with a P / E of 15 smaller and assumes the Company will pay 10 times earnings (P / E = 10). Small businesses will gain 10 million U.S. dollars are included with those of the company BIG.
GainsCalculation - is less the result are now worth 15X instead of 10 times earnings, the immediate to an increase in value of 5X earnings or $ 50,000,000 (5 times $ 10,000,000) and paid on the value of enterprise BIG .
Strategy # 2 - Reduce costs through economies of scale
The picture is even better if the elimination of duplication and other economies of scale will be smaller companies reduce costs. Every dollar reduction in costs resulting in $ 15 of value (P / E ratio of15 X $ 1).
Gains Calculation - Company BIG is able to eliminate 1 million U.S. dollars of redundant expense - $ 1,000,000 X 15 = $ 15 million dollar increase in value.
Strategy # 3 - You buy a strategic plan
BIGS acquisition of a company in order to gain certain benefits such as: proprietary products, technology, distribution channels, or talent base could, for example, to an improved outlook for company BIG. The P / E ratio usually reflectsExpectations of future profits, a strategic acquisition often produces a P / E increases. In this example, company BIG P / E ratio increases by a dollar from 15X to 16 times earnings after the takeover was announced.
Gains Calculation - Every point increase in company BIG P / E ratio corresponds to 111 million U.S. dollars of value added (the original 100 million U.S. dollars plus the addition of small profits is 10 million U.S. dollars plus $ 1 million to reduce the costs by 1).
CalculatingIncreased Shareholder Value:
In the above example, company BIG takeover of the company SMALLER not only the result by 10 million U.S. dollars has increased, but has increased the value of BIG company as follows.
Higher value of 10 million U.S. dollars in earnings $ 50,000,000
Is reduced to less than U.S. $ 1 million 15,000,000
Increase in the BIG P / E ratio 15 to 16 111,000,000
Total increase in the size of the stack (VALUE) $ 176,000,000
This CEO has made the nature of a businessthat the shareholders happy.
No wonder there is so much M & A activity in the market. A well conceived acquisition should produce wondrous results. These dynamics are not exclusively reserved for public enterprises. Private and family life, companies can and should take advantage of, the opportunities presented by growth through acquisitions. We will now analyze these principles to smaller businesses and the results.
Value Strategies for Building
Small and Middle MarketCompany
Private companies can use the same three strategies in the above example, Public Company, such as an understanding of a few basic principles.
General Principles:
Financial
Small businesses usually have small P / E ratio. P / E ratio to increase as companies grow and develop structure. P / E ratio increases to reduce the dependence on the owner.
Valuation principles
Two great value predictors are:
Perception of risk and
Expectation of futureProfit
Companies with substantially the same result, therefore, can have very different values
"Round Ball" Principle - Non Financial
None of us are talented in all directions. We are not round balls, balls and Frisbees, perhaps, but no one can "do it all" good. Company strengths and weaknesses is therefore usually a mirror of its owner.
With a basic understanding of the basic rules Armed we can begin to formulate a strategic plan to grow and buildWealth through acquisitions. Table A summarizes P / E, level of earnings, the definition of earnings and management style of companies. We can use Table A as reference as we develop our plan.
Table A
P / E Ratio usual level of results
and defining the type of earnings management
Wall Street to 15X
OMG * Usually measured in millions
Definition of Earnings: After-tax
* Oh My God
Professional management with many levels of responsibility. --The goal of management is to maximize profits and shareholder value to meet the requirements.
Middle
Market 3 to 15X
$ 500,000 million small
Definition of Earnings: before / after tax EBIT different if the company provides a unique opportunity, (proprietary product, technology, channels of distribution, talent base etc.), all money, high multiple Wall Street price out of reach. Otherwise dynamics was considered when selling Upper Main Street. SegmentationResponsibility and management structure defined. Owners may or may not be involved in service to a considerable extent.
Upper Main
Street from 3 to 7X
More than 100,000 U.S. dollars, but less than U.S. $ 500,000
Definition of Earnings:
~ The adjusted EBIT, earnings before interest, taxes, plus depreciation
and adjustments (taking into account a
Appropriate Manager's salary)
Owner even more important factor in the success of the company. Levels of responsibility and management structuredeveloped.
Main Street from 1 to 4X
As a rule, 100K, more or less
Definition of Earnings:
Discretionary income - dollars available: New Ownership
Compensation, acquisition debt
Actual depreciation Service
Reserves and return on invested
Capital. Owners is critical to operations. "Does all the hats" - little to no management depth.
Develop your plan
The plan should begin with an honest assessment of your company's strengths, weaknesses andOpportunities represent your company and industry. Picture a bell curve represents your company's strengths and weaknesses. The peak of the curve is what you, wherever you are. The outer extremes represent areas of opportunity. Your ideal acquisition should be a firm whose bell curve is the opposite of benefit to you and by acquisition, both companies.
Example:
Their areas of strength are:
High quality workmanship,
On-time delivery,
Good Managementwith
Excellent systems and controls, plus,
A loyal customer base.
Areas of opportunity are:
Need quality sales force,
Additional functions
Competent staff and
Access to new customers.
Take this example that you have a company with annual sales of 10 million U.S. dollars. Their specialty is high-speed black and white 81 / 2 X 11 with some spot color. They produce manuals and forms management services for theComputer industry and others however you serve enterprises, mainly in high tech.
They develop a plan, a small printer with a sales and purchase quality workforce to serve an entirely different clientele. You decide that the company would lack the color and graphic design capabilities of your company and the company shall be able to represent more opportunity for improvement through improved systems, controls and administration.
Further definition and search
Online and other computerDatabases make finding your acquisition easier than ever before. Additional search criteria usually includes:
Geographical area
Number of employees
Annual sales or revenues
Specific SIC # searched for Type Business
Single or multiple locations
Once you have your list of potential acquisitions has been completed is the fun part of mailing can begin work, visiting and touring, negotiating, and finally closing. You can try to do the work yourself, or you canengage professional intermediaries act as your in-house M & A department.
The transaction and the benefits
She had reviewed your company before the acquisition and determined a value of $ 7,500,000 (P / E ratio of 7.5 with an adjusted EBIT of $ 1,000,000) - the size of your pile = $ 7,500,000.
You buy a company that meets your criteria, with 3 million U.S. dollars in sales and an adjusted EBIT of $ 400,000. You or paying 4 times Adjusted EBIT $ 1,600,000. To develop after the takeover of the combined company and aP / E of 10, or a total of 15,000,000 (profit of 1,000,000 + 500,000 or 1,500,000 X 10). Improved systems and controls, and elimination of redundant income rose 100,000.
Calculate the increased volume of Pile (Value)
In the above example, increased by acquiring not only the result of 600,000 U.S. dollars, but the merged company to increase the value as follows.
Price
New multiple of 10 X combined earnings of $ 1,600,00 16,000,000
Age value of7.5MM plus Acquisition of 1.6 mm - 9100000
Total increase in the size of the stack (VALUE) $ 6,900,000
Improvements in management skills, sales and customers and should the possibility of cross-selling pressure thus the merged company to increase revenues, profits and value even further.
Do It Again
Management determines that if all of the mailing and fulfillment companies combined companies brought jobs now (about 300,000 U.S. dollars / year)in the house would be to increase earnings and attract additional customers combined company for the same reasons mentioned above. A small mailing service with 750,000 U.S. dollars in sales and 150,000 dollars of profit is bought for € 450,000 or P / E ratio of 3 Management calculates earnings of $ 150,000 to 215,000 with the addition of the 300,000 U.S. dollars to increase volume and small scale.
Management calculates an increase in value of U.S. $ 750,000 purchase as follows:
PurchasedResults @ $ 150,000 plus
Added income of $ 65,000 from work previously outsourced
Produced $ 215,000 will be added as a result of the combined company profits
Multiplied by combined companies P / E of 10
Creates a new value ($ 215,000 x 10) $ 2,150,000
This acquisition has $ 215,000 in earnings but produces an increase in the size of the cluster (in value) of 1,400,000 dollars on a new value of $ 2,150,000th
Abstract
Let's measure the height of the stack after applyingthese principles growth through acquisition.
Value of the original Company $ 7,500,000
Price paid for the initial acquisition 1600000
Advantage of the first acquisition 6900000
Price paid second acquisition 750,000
Use the second acquisition 1400000
Total Pile (Value) $ 18,150,000
You may be wondering how long it would take to achieve these results .- less than a year with professional help. Do not be discouraged because your businessdoes not generate 10 million turnover. The principles we have outlined work regardless of the current size of your company, although the larger you are, the easier it is to achieve dramatic results.
Perhaps you are one of thousands of "baby boomers" who will be at the usual age of retirement in a few years. They have built a fine company and perhaps the thought, maybe sell them one day is uncomfortable. Perhaps it would be fun to one side of the Public Company the CEOTextbook. Focus on value and growth of your company so you can leave in style with a stack.
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