Recently my telephone has been ringing with calls from Business Owners who are wondering what they should do in this economy. Should they sell now? Would it be wise to try and find more Equity? Do I know of any competitors that have $5 to $15 million in sales that would like to sell cheap? Frequently these calls are coming from our core base of manufacturing clients who are privately held. I normally ask, “What is your current set of circumstances?” Here is the typical response: “I was going along just fine in 2008, then in November my sales fell 50% to 80%, we have not been able to bring in much new business and my existing client base is being very cautious about ordering product.” Welcome to the club! We have seen numerous companies with slower or diminishing sales in 2009. Most notably, we have begun to see businesses that have been profitable in the past, starting to lose money for the first time in years (or first time ever). Somehow knowing that you are not alone is not very comforting, especially if the Bank is saying you may want to find some additional equity to put into your business. Here is an option you may want to consider- a Merger. Now may be a good time to merge with a competitor who is in a similar situation. I know that it is hard or almost impossible to find the perfect fit, but in these economic times perhaps a reasonably good fit may be acceptable. Let me give you a hypothetical situation. Let’s say I have a client who we will call John. John has a nice manufacturing business that normally makes $1 million in profit on $15 million in sales. Sales in 2008 finished off at $12 million with break-even cash flow. Sales in 2009 are starting to move towards $10 million with a loss of ($500,000). The Bank is asking John to put in $250,000 right away and they will review progress in 90-days. John has a lease payment on his building that is 25% higher than current market rates. John feels he is well positioned for when the Market “comes back” but does not have unlimited resources if profits do not improve by 2010. John knows a competitor (Company – B) with similar product lines, customers and business ethics that he would consider partnering with in an effort to consolidate overhead, marketing, and administrative costs. However, John would never disclose his current financial situation with Company – B for fear of market repercussions. At our suggestion we approach Company – B with the idea of a potential merger. After some fact finding, we secure a Mutual Non- Disclosure (prepared by John’s attorney) and proceed with a discussion either independently or with both parties about what could be gained from a Merger. The following are some of the questions we ask:
  1. What are the benefits of putting these two companies together?
  2. Are there significant cost savings by reducing or eliminating overhead?
  3. Would your Vendors approve of a Merger?
  4. Would your Clients approve of a Merger?
  5. Can you maximize employee productivity with a Merger?
  6. What IT system would the merged entity use?
  7. Would the merged entity be Bankable?
  8. Will the new entity require additional capital going forward?
  9. Will this help either party get released from a personal guarantee? And…
  10. Can the two of you work together to meet your personal and professional goals and objectives? I have never seen a merger of absolute equals, so there will be compromise necessary to make this work.
After much discussion, we make the decision to move forward based on the following assumptions:
  • John moves into Company B’s building with an overall savings of $200,000/yr., starting in Year 2
  • 75% of employees have jobs in the newly combined company with an overall savings of $650,000/yr
  • Surplus/overlapping equipment is sold at auction with an annual cash-flow savings of $100,000/yr
  • $100,000 in additional savings will come from efficiencies from savings in combined IT, insurances, employee benefits, etc.
  • A new Board of Directors is selected to help John and the President of Company B split-up the duties of the CEO and President. The CEO and President now report to the Board. Compensation is based on the performance of the combined entities. In addition to the management issues, the Board assists with the selection of the combined company’s professionals on a go forward basis.
  • A new Banking relationship is set-up to assure adequate working capital moving forward.
At Quazar we call this scenario “one plus one equals one plus (1 + 1 = 1+). I realize that this is a hypothetical situation, but I think you will find it is a workable option to be considered. If after going through this exercise your decision is to move forward, I would suggest to both parties that a CPA get involved to help run pro-forma numbers to see if the potential benefits outweigh the cost and heartburn involved with moving forward. This may not be the best solution for all businesses going through a downturn but it may be a better option than selling at a discount or liquidating your company. We are currently involved with Clients that are contemplating a Merger; in one case the merged entities would have an increase in cash flow of well over 100%. If we are able to make the merger happen, the Bank would be happy, most of the employees would be happy, the customers would be better served in the long run and the business owners would sleep better knowing they have the opportunity to build additional equity and perhaps be able to retire someday with money in the bank. If you are looking for solutions to a similar situation, please take a few moments to talk to your professional advisors about what your company may have to offer in the event of a Merger.