The business advisor: October 2010

Although the current economic climate promises to present significant challenges for some businesses, it is an opportune time for well-managed and well-financed companies to consider a strategic acquisition that will position them for growth.

Although the current economic climate promises to present significant
challenges for some businesses, it is an opportune time for
well-managed and well-financed companies to consider a strategic
acquisition that will position them for growth.

Welcome to the Ask the Business Advisor series. Over the next year, watch this space for valuable information on how to run a profitable business. This column is designed to help you work on your business. We will cover topics that span the lifecycle of a business, beginning with subjects related to investing decisions, then moving to preserving value (operations management) and ending with realizing value (managing the exit process). Fuller Landau LLP, home to this series’ authors, is a full-service chartered accounting and business advisory firm that assists business owners through all stages of the business lifecycle with the ultimate goal of helping business owners increase their net worth.

Questions are encouraged! Please feel free to send them in to the business advisors via laiken@annexweb.com.

The first article in the series is dedicated to determining if the business you are looking to buy is worth the investment. There are a number of companies on the market for sale and you may even have your eye on one or two right now. While they may be attractive at first glance, carefully assessing a potential acquisition is critical to the success of this endeavour.

While there is no simple formula for approaching a potential acquisition, the following five steps should be considered.

Understand your risk tolerance
It is critical to understand your company’s risk tolerance to ensure you obtain the appropriate risk/reward balance. Conducting a thorough internal assessment of your management strengths and operations will allow you to determine all available options. You also need to be aware of external factors such as availability of capital, cost of capital, and local, national and global industry trends.

It is also important to have a full understanding of your own growth limitations. If, for example, your road to future success lies in expanding through new products, brands or geography, but the capital and time commitment of pursuing growth organically is too high, then an acquisition strategy may be the ideal approach.

Find the right opportunities for profit
With a well-defined strategic plan, and a keen eye for the right opportunity to complement an existing business model, an acquisition can prove to be the way to overcome any growth hurdles.

For example, you can obtain greater market share by purchasing a competing business at a great price. This strategy can also allow you to diversify your product offering, production options or distribution channels.

Develop a plan
Every deal you are considering should start with a coherent and definite plan that will show how the transaction would generate value to your existing business. For example, it should answer questions like: What cost advantages could be obtained by producing new products with the same raw materials? What efficiencies can be leveraged from using existing distribution channels? Are new distribution channels needed? How will the acquisition affect staffing? Is there existing plant capacity, or will the plant require renovations to accommodate production of the added products? Will there be any regulatory, licensing or safety requirements or approvals required?

Perform due diligence
Before you close any deal, you need to perform some level of due diligence. Due diligence is customized to each individual transaction and takes a focused look into the financial and operational status of the target. It includes, among other things, quality of earnings, quality of assets, potential tax exposures and liabilities, organizational infrastructures, quality of management and technology.

A solid acquisition structure to prevent tax implications
How you structure your proposed acquisition from a tax standpoint is an important consideration. You could structure your acquisition through a corporation, a partnership, an individual purchase or as a trust.
Each of these structures has different rules on how and at what rate the income from the investment will be taxed, and each has different benefits or consequences depending on your needs.

In today’s uncertain economic climate, or even when the financial landscape is thriving, no acquisition is without risk. However, with a well thought out strategy and the right expertise on hand, healthy businesses can significantly reduce those risk factors to drive stronger, more profitable results.

ask the Advisor
Question / I found a business that I want to buy. The vendor wants to sell me the shares but I’ve been advised to purchase only the assets (i.e., inventory and equipment). What’s the difference?

For the answer, go to www.bakersjournal.com

Wayne Gelb	Bruce Roher

Wayne Gelb is a partner in the audit and assurance practice and Bruce Roher is a partner in the valuations department at the Toronto office of Fuller Landau LLP.