Is It Time to Make Your First Acquisition?

If you’ve grown your business to the point at which you’re ready to make your first acquisition, congratulations! Reaching this milestone is a result of the hard work you’ve put in and positions you for even more growth opportunities.

It’s a good time for your first acquisition

Now may be the ideal time for you to buy because many small businesses are showing an interest in being acquired. Within the just the past year, the number of small business acquisitions grew 10%. This could be due to several factors:

• Longtime owners. Owners that are at or reaching retirement age are seeking successful exit strategies to secure their legacy.
• Compliance burdens. Increased government regulations and complex licensing procedures can be overwhelming for small businesses.
• Lack of capacity: Small businesses may lack the resources or expertise to expand on their own.

What can your first acquisition accomplish?

A carefully planned acquisition can help your business achieve a variety of strategic objectives including but not limited to:

• • Economies of scale. Acquisitions allow you to spread most of your operating costs across more revenue. For example, you may be able to get more impact from your investment in marketing and use your larger size to increase your negotiating strength with service providers.
  • Greater diversification and market share. The larger your business becomes, the more stable it can be. You might get requests from people to open an office in another location, or you might identify a gap in the market for the services you offer. The business you acquire can have distribution channels or markets that will increase your company’s reach and expand your overall client base, helping you reduce risk.
  • Staff development. If you’ve built a great team, and some of them are ready to move into management, you can allow them to advance their careers as you increase your income. Driven employees like to be challenged, and acquisitions can take them out of their daily routines and provide them an opportunity to contribute in other ways—especially if you provide incentives.
    
    

What are the risks?

While a well-planned acquisition can propel your business forward, there are also risks for you to consider. For example, as a first-time acquirer you might be worried about:

• • Losing clients. Focusing too much on acquiring another business can lead to neglecting your existing client base. A decline in service quality can damage your company’s reputation and drive them away.
  • Employee morale. Uncertainty and a lack of communication during the acquisition process can cause employee morale to plummet. Disengaged and unhappy employees can negatively impact overall productivity and customer service.
  • Acquisition Cost. The cost of acquiring another business regardless if you do so with debt or equity can have serious financial implications for the future of your business. You’ll have to look at your numbers and evaluate carefully.

It’s important to understand these challenges and develop strategies to mitigate them. Integrating your employees in many aspects of the acquisition process can help prevent potential losses.

Tax considerations for your first acquisition

Federal and state taxes can be complicated and determining how your first acquisition might affect your taxes demands the expertise of a CPA or other tax professional. The tax impact depends largely on how your business is legally structured (whether it’s a sole proprietorship, partnership, or corporation), the structure of the business you’re buying, and how the combined company will be structured. For example, the rules are different for C-corporations and S-corporations.

For instance, if you plan to operate the company from a single office, you'll lose the expense deductions related to the acquired company's facilities—which is why your accountant will prepare projections.

Taking the first step

Deciding to acquire another business for the first time can be exciting and stressful. If you feel like there aren’t enough hours in the day or that you never get a chance to relax, this may not be the right time for you to consider a growth strategy.

Before you start looking at listings, you may want to reach out to experts who can help you through the acquisition process efficiently, like a consultant, an attorney who does merger and acquisition work, capital partners, or accountants. Your time is valuable as a business owner, which is why we at Oak Street Funding designed a free exchange to make the first step as simple and stress-free as possible. When you’re ready, we can be there to help you navigate through it.