A KPMG study conducted in 2000 determined that only 17% of Mergers and Acquisitions examined created a substantial return and, even more discouraging, 53% destroyed value. Validating these findings, a six year study by Business Week showed that 61% destroyed value that existed prior to the acquisition.

Which is why Warren Buffett, in a recent shareholder letter said, “Don’t ask the barber if you need a haircut”.   It was his thinly veiled dig at Wall Street bankers and the perverse incentive system for corporate “advice” on mergers and acquisitions — namely that bankers are paid only if a deal is completed. Given how the incentives work…you will get a haircut.  Buffett, of course, is no stranger to deals and he’s got an idea for companies that think they need counsel: reward one advising bank if the deal goes through, and another if it doesn’t. 

So…what are the implications for smaller companies?

For most business owners the most significant M&A deal they do will be the sale of their company.  There are 20 million companies with employees under 1,000, and about 70% are expected to change hands in the next 10 to 15 years.  But only about 20% of companies will actually complete a successful sale.  Many owners begin their Exit Plan by speaking with a Business Broker or M&A advisor – transactional advisors who only get paid for a sale.  So, it’s no surprise that they are advised to get the haircut.

A better way to begin an Exit Strategy plan is to discover your own goals, personal circumstances, and needs which can depend on how you treat your business – as an investment or as a lifestyle, whether you have developed independent retirement funds, what your family and estate tax situation is.  After a review of these factors, you can then evaluate some Exit options – which might include Private Equity, Management buy-outs, ESOPs, and even strategic gifting – as well as a Sale.

Once this review is complete, you can now pick an advisory team.  If a sale is indicated then it will be time to employ a value enhancement process to maximize sale proceeds, and to engage with a reputable M&A company.  Other advisors will include experts in legal, estate, and tax matters.  For a full discussion of Exit Strategy Planning, contact a B2B CFO® partner.  David Kirkup – 404 348 0326 and dkirkup@b2bcfo.com