Home August 2015 MERGERS & ACQUISITIONS: Begin With the End in Mind

MERGERS & ACQUISITIONS: Begin With the End in Mind

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MERGERS & ACQUISITIONS: Begin With the End in Mind

4. Invest in or upgrade the ERP system.
If you have aspirations of becoming a much larger business or consider private equity firms as potential suitors, using an antiquated [glossary]ERP[/glossary] software system will hurt you. If you have time, it’s worth the investment many times over to get the right system in place which can grow with you (i.e., “scalable”), can provide you with all the data you could ever want, and the ability to manipulate said data in whatever means necessary. The importance of having a good ERP system can’t be understated, not to mention system conversions are risky in and of themselves. You’re going to pay for that risk one way or another.

5. Avoid concentrations and create economies of scale.
If you’re a small to medium-sized business selling to billion dollar national builders, and buying products from billion dollar vendors, you’d probably agree your business life is uncomfortable. Symptoms from this poor business dynamic, issues that give buyers pause, are customer and vendor concentrations. As a benchmark, no single customer should account for more than 20% of your business—which can be hard to do with national builders as customers. A business can also have vendor concentrations. What’s to stop your billion dollar competitors from cutting a deal to prevent your company from buying certain brands? You’re kidding yourself if you think it can’t happen, as it already has in subtle ways via manufacturers in various product categories requiring customers to purchase in higher volumes. Smaller businesses are already getting squeezed from vendors.

What can you do? Keep that 20% customer, of course, but do what you can to diversify away from the customer so the 20% becomes 10% or 5% over time. Try to create a more balanced customer base by pursuing customer types where the economies of scale are in your favor (i.e. custom builders, small remodeling contractors, etc.). This is also a case for doing what you can to increase the size of your business, or in the very least participate in the various buying cooperatives out there to help keep vendors in line.

Focus on these issues, and it’s likely your equity value will climb over time as you’ll be more profitable, pay down debt faster, etc. What’s more, you’ll be prepared to demand a higher valuation if and when you decide to sell.