Growth Through Acquisition: A Strategy to Expand Your Business

Grow, grow, grow, scale, scale, scale!

Do you constantly feel pressure to grow and scale your business but you’re not sure what direction to go in?

Consider GROWTH by ACQUISITION.

Normally when we think of growth, we think of creating additional revenue streams, expanding geographically or serving a new customer segment.

When we think of scale it often involves adding a new technology or franchising the business.

Growing through acquisition is a strategic way to expand your business too.

Acquisition requires careful planning and execution to ensure financial stability and long-term success.

Here are 5 key financial actions a small business owner should take when considering and executing an acquisition:

1. Conduct Thorough Due Diligence

Review the target company’s financial statements for the past 3-5 years (income statements, balance sheets, cash flow statements, loan documents) to identify trends, areas of potential weakness and determine it’s overall financial health.

In addition to financial statements, look at tax returns to see what was actually reported to federal and state authorities.

Valuation: Either have a valuation specialist give a reasonable range of the company’s value OR ask the seller for audited financials or a quality of earnings report

2. Develop a Strategic Plan and Perform Financial Projections

Develop a comprehensive integration plan that addresses how your operations, org chart and technological will change by integrating the new business into your own. Identify potential synergies that would reduce costs (e.g. avoid duplication of roles/responsibilities).

Factor these cost reductions and investments in growth when creating financial projections of the future financial performance of the combined entities.

Also create a cash flow forecast to ensure the combined cash flow is sufficient to cover operating expenses, debt obligations (including any new SBA financing), and growth investments.

If forecasting and projections is not your forte, please invest in the right fractional CFO expertise to help you validate that this acquisition will be a financially worthy deal before securing any financing.

3. Secure Financing

Though there are various funding sources like investors, alternative debt,  private equity and seller financing.

But one of the better forms of financing is through SBA lenders that offer the SBA 7(a) loan and SBA 504 loan programs.

The SBA 7(a) loan is the SBA’s primary business loan program, and provides loan guarantees to lenders. The lenders in turn provide financial help for small businesses with special requirements

Potential uses of funds include: purchasing an existing business, real estate, equipment, working capital, and refinancing debt.

Loan Amounts: Up to $5 million. Repayment Terms: Up to 10 years for working capital and equipment, and up to 25 years for real estate.

The SBA 504 loan program provides long-term, fixed rate financing for major fixed assets that promote business growth and job creation.

It’s typically used for purchasing real estate, land, buildings, and long-term machinery and equipment. The loan Structure involves two loans (one from a lender covering 50% of the project cost, and one from a Certified Development Company (CDC) covering up to 40%, with a 10% borrower down payment).

Loan Amounts: Up to $5.5 million for the SBA portion. Repayment Terms:10, 20, or 25 years.

4. Optimize Tax Strategy

Involve your CPA in the preparation phase of an acquisition. They can prepare you for the tax consequences of the acquisition and help you structure a deal that optimizes tax efficiencies.

They should also be aware of any tax credits and incentives that may be available for the acquisition.

5. Leverage Professional Advisors

As you’re moving through this complicated process you will need different experts (I’ll explain in my next newsletter) including a fractional CFO to serve as your quarterback through every play of what can be a complicated process.

When Evan Janovic sold his famous NYC based Janovic paint company to Benjamin Moore, he said it was his internal CFO that was most critical to the deal because he understood the numbers and nuances of a small business and was the best to communicate the company’s value to the buyer’s corporate accountants and valuation specialists.

This is just a sliver of what to prepare for. If you want a strategic financial partner to guide you through a small or sizable acquisition and the SBA financing options, click this link to schedule a strategy call with me.

-Tricia

Tricia Taitt is the CEO and Chief Financial Choreographer of FinCore. She holds an M.B.A from The Fuqua School of Business of Duke University, and a BS in Economics with a Finance concentration from The Wharton School at the University of Pennsylvania. For over 20 years, she’s been a finance professional. Half of the time was spent working on Wall Street while the other half was spent in the trenches side by side with small business owners. As a result of working with FinCore, clients have been able to take control of their numbers and feel more confident in their ability to make decisions, while increasing profits by 10% and building a cash stash to invest in growth. Follow Tricia on LinkedIn and Instagram.

If you’re ready to see what our team of CFOs can do for your small business, Book a Financial Consult.