Basic financial services required by emerging growth companies go far beyond raising capital or devising strategies for future growth. Executives, with or without financial backgrounds, want and need the knowledge of a specialist in selected areas, from formulating corporate strategy; to acquisition of other companies and product lines; to preparation for acquisition by or merger with another company. Continued successful growth depends on access to a broad spectrum of specialized financial services.

Basic assistance in areas such as underwriting for going public and raising venture capital are well known to the owners of small sized growth companies. Such services are regularly written about and discussed. Little, however, is written about another service that offers strong benefits to both the owners and the company, that of acquisition or merger assistance.

Truly professional assistance in preparing the company for sale, finding the correct merger partner, and orchestrating a smooth transaction, is often difficult for a smaller company to obtain. Large Wall Street investment banking houses have little interest in these middle market companies, generally considering the financial stakes involved as too low. Many regional financial institutions that act as intermediaries in merger and acquisition situations for middle market companies quite often do not have the contacts or the sophisticated marketing techniques to reach beyond their immediate geographic area. Small and medium sized emerging companies, or those seeking to acquire such companies, would do well to seek the assistance of a small but very experienced consulting organization, which, because of a unique business background, better understands the treatment of such clients; a group that offers knowledge, expertise, a successful marketing technique, and, equally, if not more important, a database of national and international contacts.

WHAT NEEDS TO BE DONE?

The emerging company requires a service that embodies analyzing the company; its past and its future; selecting and locating the preferred buyer; and equally important, finalizing the appropriate transaction.

In most instances, when selling their companies, owners look for merger partners who will allow their company the proper environment to continue in the direction previously set, one that best utilizes the specialized characteristics the company has to offer. Entrepreneurs typically seek a merger partner that will: (a) allow the company to follow its short- and long-term plans; (b) not attempt to smother the acquired company, either by bureaucratic policies or by ignoring the very factors that have made the company successful up to the date of acquisition; (c) allow it to take assistance, capital, technology, sales and marketing expertise from its new owner to spur growth; and most importantly, (d) take care of the people who make the smaller company the positive acquisition that it is.

To achieve these goals, obtaining professional expertise in the merger and acquisition process becomes essential. Companies seeking partners need the assistance of someone who will counsel management as to what best suits the entrepreneur's plans for the company; what he/she hopes the company will do and what area of industry is most attractive for the company being sold.

The financial intermediary must understand the company and the people who have made it what it is—not simply find a buyer, make a marriage and collect a fee.

The first step that must be taken when moving toward an eventual sale is the proper positioning of the company. "Positioning" is a very broadly defined term, yet it is always tailored specifically to the particular company. This does not mean the seller should try to "window dress" the company. Rather, the seller must try to do those things that are appealing to a larger company buyer.

Analyzing the company. This analysis will be from the point of view of a potential buyer. It will describe the company; its business activities; its markets; and past, present, and projected future operating results.

Develop a business plan. A merger partner will want to know the company's specific plans for future growth. It is not sufficient to state that the company will have 50 percent growth in each succeeding year, even if such growth has been a historical fact. It is very important to be able to show a corporate strategic plan, already in place, that will demonstrate the projected growth, and more important, the underlying market reasons for such growth. This is particularly significant in those industry segments in which a strategic growth plan can quickly become outdated. The business plan must be a truly realistic document, able to serve as an accurate guide for the company to use. The business plan must never be merely designed as a selling document.

Nonetheless, a selling document would not be out of place. A properly prepared report, containing pertinent facts, should make certain information available to a potential buyer. Included in such a document should be such things as a five year history (if appropriate) of financial data, to include both balance sheet and income statements; complete descriptions of products and services presently sold, markets covered and market share; descriptions of newly introduced products and plans for their development, as well as general information concerning future developments being planned for introduction in the marketplace; complete data concerning personnel, including background details on key individuals; descriptions of real estate and facilities; and information which describes the fixed assets currently in use and their state-of-the-art, relative to use in the company's production process.

IT'S TIME TO REVIEW MANAGEMENT

If a company does not have some reasonable depth of management, it should consider taking the necessary steps to enhance that which it already possesses. When considering a search for an appropriate merger partner, smaller companies should be prepared to make the jump from entrepreneurial to substantive management. Such a move will enable a potential partner to perceive the company as stable in the management area and not merely dependent on the individual entrepreneur. It is at this point in a company's maturation cycle that it might consider investing some of its "R&D" funds in management enhancement. The company should be, and should appear to be, a professionally managed organization.

In a well run search for a merger partner, it is absolutely essential that the selling company select only one financial intermediary to work with. Use of a single financial advisor will help to ensure confidentiality and eliminate the prospect of a selling company being "shopped" to an unsuitable universe of "buyers," many of whom have neither the means nor the intent to complete the transaction.

Before beginning the actual process of seeking out a merger partner, the company, with the assistance of its financial advisor, should prepare a carefully worked out strategy, in exactly the same manner as it would approach any other future growth plan. Next to the selection of a proper financial advisor/intermediary, this is the most crucial step in planning and executing a successful merger transaction.

Following completion of the document which describes the company as completely and accurately as possible in the light of available facts, the financial advisor, working with management, should prepare a list containing a universe of potential buyers. This list should name as many as possible of the potential partners, concentrating on those who would be most preferred by management.

When preparing such a list, certain questions must be answered. With what kind of company would the sellers be most willing to become associated? What is the corporate culture of each of the companies within the universe of potential partners? What industry does management feel that it would be comfortable operating in and which would be inappropriate? Do candidates within the universe of potential partners represent companies with a history of having made other transactions? Have such transactions been successful from the perspective of both parties?

Having chosen the potentially preferred partners from the identified universe, management, together with its financial advisor, should prioritize the candidates to select the ones to approach first. The manner in which the preferred buyer is to be approached should be carefully discussed between the company's management and its financial advisor.

The financial intermediary will then initiate the appropriate contacts discreetly; supply the necessary follow-up information; participate in negotiations; and develop and finalize the transaction to the satisfaction of the seller. It is essential for a company retaining a professional financial intermediary to recognize that all inquiries, from whatever source, be referred to and handled by its advisor.

Unlike the "window" for public offerings that opens and closes on a regular basis, the market for acquisitions never abates. There is a merger partner for every selling company. The most important step is identification of the most appropriate partner from all of the suitors who will appear at first sign of a potential merger. In order to accomplish this, the financial intermediary must sell the company and not simply wait for it to be bought. When accomplished improperly, a merger can produce extremely unpleasant results. Handled correctly, with close coordination between management and a professional, knowledgeable financial intermediary, the sale of a company can result in significant benefits to the owners, key employees and the selected merger partner.

Most business entities of any size and structure manage with the aid of a fiscal budget, generally combined with one or more long-term operating plans. Such plans are generally created far in advance of their use. While plans are recognized as subject to variation and change, in order to react to economic or market conditions and other necessities, few capable corporate executives would suggest their elimination from the normal operational process.

Unfortunately, the typical approach of many companies to corporate development is all too often the result of serendipity, rather than careful strategic planning. More than one executive responsible for corporate planning and/or development has made—or been pressured into making—very important decisions concerning target companies, based on what is presently understood as being available for sale, or on which potential candidate has made the most recent approach with acquisition in mind.

Serendipitous acquisitions can often be laid at the feet of those other than development executives—as in the case of a CEO who had been carefully searching for an unequivocally strategic diversification. Having spent almost a year seeking a candidate to move his company into a completely new market, the manager in question fell "prey" to a company which manufactured and sold a product almost identical to that with which his own company had been involved since inception. The totality of "strategic diversification" in this instance was represented by 40% more revenue—with absolutely no enhancement to product or change in marketplace. Almost predictably, the deal did not work out, and the now ex-CEO's successor is still grappling with his acquired problems. He is also making plans for a proper, strategically oriented approach to external growth for the future.

Despite their relative value in the consummation of transactions, intermediaries are very often the cause of serendipitous, but otherwise inappropriate deals. A well-written and artfully presented sale memorandum has been the reason for more than one purchase of a candidate that appeared as an attractive acquisition—but was actually 180 degrees off from the targets outlined in a carefully worked-out strategic plan. Serendipity, of course, should not always be viewed in a derogatory manner. One of the most successful acquisitions in my personal experience arose in a purely serendipitous manner. While on a business trip which had several meetings scheduled with potential candidates, we received a call from a representative of one of the larger and more prestigious investment banking firms. He mentioned a candidate company far removed from then current corporate strategic plans—but in an industry which was quite appropriate and had been thoroughly sifted in previous years. Following preliminary exposure to the candidate, and recognizing the opportunity, we obtained corporate approval to proceed, and a transaction was completed in slightly less than six months. More than 10 years later, this acquisition is one of the cornerstones of a most successful profit center. Accidental discovery and acquisition of even an excellent candidate should never take the place of creating and following a pre-set strategic plan. Smaller companies, and others without dedicated planning staffs, should seek assistance from available consultants with experience in both their industry segment—and strategic planning.

Strategic plans are always subject to change and variance. Embarking on an acquisition program without one, however, can be likened to starting a holiday driving tour in a totally strange country—without a road map. In both instances the trip may be very enjoyable—but filled with costly and time consuming detours and mistakes.