Leveraged Acquisitions

Overview

Are you managing a business in a fragmented industry that is ready for consolidation?

Are you a well-managed business with an underleveraged Balance Sheet?

Would you like to grow your business through an acquisition of another company, but you have not identified the specific company? 

Do you know the amount you can spend on acquiring another company without recklessly risking all of the equity that you have built up in your own business? 

Would you like to buy a business, but do not believe you have access to the capital?

Opportunity

At any given point in time, there are many fragmented industries that present excellent opportunities for consolidation, the proverbial “1 + 1 = 3” situation.  By the elimination of certain duplicated overhead functions, it is often possible for one company to acquire another in the same industry and generate more earnings from operations than the sum of what the two companies earned when separate.  Greater efficiency can also be obtained in sales, warehousing, delivery, purchasing and other areas.                         

Many companies are consistently generating free cash flow from operations and are faced with the choice of re-investing that free cash flow back into their business or simply distributing such free cash flow to their owners.  Generally, people are better off investing in things they know something about; therefore, investing in another company within your own industry makes a lot of sense.  In addition, an underleveraged Balance Sheet is a terrible thing to waste.  You can use your Balance Sheet and free cash flow to help you acquire another company, often without the need for any additional equity.

Solution

Identifying the right company to buy can be accomplished with the help of investment bankers.  After taking the time to clearly define the characteristics and size of the company you seek, the investment bankers follow a disciplined, scientific approach to identifying potential candidates. 

Once a Letter of Intent is executed with your target company, you are ready to obtain the financing required to accomplish the transaction.  Many companies can acquire a business with little to no equity and the right mix of properly structured debt financing.  First, you should maximize the amount of money you can borrow from your bank (leaving some un-drawn availability on your revolving line-of-credit for unanticipated events that always seem to occur).  Next, you should obtain the maximum amount of mezzanine debt that the combined free cash flows of the companies can comfortably support.  Then, if needed, you should obtain the maximum amount of mezzanine preferred equity that you can.  Finally, if necessary, you can obtain equity or seller financing for the balance.

Avoiding Common Pitfalls

Many companies get caught up in the acquisition process and become enamored with the thought that bigger is better.  You should maintain the discipline to only look to acquire a company of an appropriate size in comparison to your existing company. 

Many companies look to acquire another company while there are still issues that need to be resolved in the operations of their existing company or before their Balance Sheet is strong enough to support additional debt.  Your likelihood of success is much greater if you wait until the right time to start making acquisitions.

The acquisition process is a major commitment of time so it is important that you determine, in advance, whether you have the time to devote to the process, without adversely affecting your existing business.