Do you really think that growing your business through acquisition of other businesses is NOT an option for you? The traditional model of borrowing a boat load of cash is not the only way to buy another company. Instead, you have the alternative of using your company’s stock (or LLC interests) as currency.
The way this works is you buy the shares of the target company using your own company shares. In effect, it is a share swap. You would offer the owners of the target company an exchange of stock. The end result is the owners of the target company become shareholders in your company, and the target company itself becomes a wholly owned subsidiary of your company.
Am I Giving Up Control?
When you add shareholders to your company, you do not necessarily have to give up control. The share agreement can stipulate that the share class is non-voting, has no board seat rights, or is entitled to profits and dividends only. A qualified M&A attorney can help you draft this agreement. As a side note, keep in mind that some attorneys will work on a fixed fee basis, instead of unlimited hours.
Reasons and Strategies
When it comes to growing your revenues, acquisitions can add speed. For example, if you want to expand into another city, you can acquire a company that operates in that city. If they are focused more on sales than production, you can supply them with products or services to sell. You may also have them provide your home office location help with organic sales expansion. So organic growth often follows acquisition growth.
When an acquisition adds redundant service, usually administrative, you have the ability to reduce this redundancy. You no longer need two separate accounting audit firms, tax accountants, invoicing services, and so forth. And over time, other administrative services can be centralized. Office space (usually rented) can be downsized, or repurposed to support a larger sales team or other functions, for example.
Acquisitions can solve production constraints. If you require a dependable supply of components, acquiring a component manufacturer can reduce your production costs. The manufacturer’s current or prior customers can still be supplied, especially with the types of components you do not need directly.
What is the End Game?
If you own shares in a company, there are really only three things you can do with those shares: hold them, sell them or swap them. In the long term view, swapping is similar to holding: you still own shares that pay dividends. The real difference is, do you want to hold the shares indefinitely, or do you want to experience a capital event? From this perspective, the goal of the series of acquisitions can be divided into either a buy-and-hold strategy, or a buy-and-exit strategy.
The buy-and-hold strategy is for legacy builders. This is the path where you want to build a large organization, keep running it, and keep improving what it delivers to the target market. You would need to take into consideration the shareholder partners you make along the way. At some point the shareholders from the acquisitions will want to sell their shares and cash out. If selling to the public is not permitted, then your company will need to buy back the stock. If you are unprepared for this event, it will consume your working capital. On the other hand, you may want to exercise your right to buy out the other shareholders. Both these scenarios can be prepared for in advance in the original share agreements that were signed at acquisition.
The buy-and-exit strategy is for wealth builders. This is not to say that legacy builders are not building wealth. The buy-and-exit strategy generates liquid capital. It has the goal of a liquidity event by a pre-agreed deadline. The event may be all cash, or part cash and part equity. In either case the goal is not to own and run the company for a long time.
About the Author
Walid Costandi has a mission: To release entrepreneurs from the shackles of their business! I am looking to partner with business owners who are ready to attain a liquidity event. Together we can identify an exit plan.
I would love to hear your comments and suggestions. Please feel free to reach out to me on LinkedIn or via email at firstname.lastname@example.org.
The above reading is from the author’s knowledge and experience. The reader should use good judgment in deciding what acquisitions to make, and evaluate the risks involved.