Corporate Finance: Patient Planning Offers Rewards; the Urge to Merge Is on the Upsurge. Mark Taylor Highlights How SMEs Can Successfully Join the Scrum

Article excerpt

Whether or not you want to take advantage of the current trend for merger mania, there are distinct advantages to fusing your company with another or to acquiring a new business or competitor.

But to be able to reap the benefits, you have to understand the process and make planning your overriding priority.

In business, as in all aspects of life, it's nearly always imperative to start from a position of strength.

SMEs considering M&A activity - or a sale or joint venture - must first focus their plans on their own businesses and ensure that their competitive advantages are in place.

The above, allied with robust profits, reputation and a healthy market, will contribute to a successful merger or sale.

The objective must be the planning and creation of a business with a tangible competitive advantage - not fleeting critical mass or economies of scale.

Whether you are considering merging your business with a competitor, selling out to a predator or forming a joint venture, the process is largely the same.

Selling a business is, arguably, the most straightforward and a successful sale offers a good blueprint for other activity.

However, whatever option you decide to take, it is important to have a thorough understanding of the issues involved as well as the necessary timescales.

As far as a business sale is concerned, SMEs which aim to place themselves on the market need to address fundamental issues such as moulding the operation into a saleable form; planning the owners' financial position; evaluating market conditions; generating an attractive financial performance track record and pinpointing the optimum time to sell.

If all of these are under control, maximum value can be extracted via the sale.

If you are the vendor, acknowledge that your motivation must be short term and solely focused on maximising reported profit for the financial period prior to your sale.

This will create internal issues when senior managers realise the shift in corporate aims to short-term profit maximisation.

These concerns must be handled sensitively.

In some instances, this may help resolve uncertainties about ageing owners and managers.

Your business's tax position is pivotal, because you should maximise post-tax gain. Examine how shares in the company are held and your family's financial planning, including children's trust and how the sale's timing will affect your future.

Tax changes are inevitable and may affect proceedings. Movements in retirement relief, capital gains tax legislation and trusts are constantly under review. It is best to monitor trends with your advisers on a regular basis.

At the crux of the business sale is the all-important valuation.

The worth of a private business is undertaken on a number of different bases - often a multiple of post-tax profits based on the price/earnings of similar quoted companies discounted to reflect the non-marketability of private company shares.

Any valuation fluctuates according to the net assets of the business, profit growth potential and the acquirer's aims, allied with the state of the business being acquitted.

Acquirers need to know whether or not the business needs capital investment.

Will it require active or passive management? Are there urgent issues which need to be addressed, such as environmental problems? Are its customer and supplier relationships good? Are there any fundamental uncertainties overshadowing the sale?

Once these considerations have been dealt with, the final link in the process is dealing with potential purchasers, who can be found via a variety of methods. …