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Let’s make a deal

Let’s make a deal

Rochester Business Journal
October 8, 1999
Special Report
Small Business
by: Lynette Haaland

Business Methods Inc. wants to double its annual revenues of $23 million over the next five years. In order to do that, the company must make more acquisitions.

The Brighton company already has acquired one company and is in the process of buying three others.

The first acquisition was the Computer System Group, a company with $2 million in revenues. This year, BMI is looking at acquiring two local companies and one company from Buffalo that do similar work, says Steven Sauer, executive vice president and chief operating officer.

Sauer believes the key to a deal is assembling the right team of experts, including a lawyer, accountant and consultant. “Confidence allows you to take the next step,” he says. “lf you don't have it, you won't pull the trigger to do the deal.”

While there are different ways to negotiate deals, there are some universal steps all companies must go through to reach a successful partnership, says Diane Harris, president of Hypotenuse Enterprises, Inc., which advises and trains other companies on the “art” of deal making. BMI's Computer System Group acquisition took approximately two months from start to finish, Sauer says.

"It went very well,” he says, referring to everything from working out the terms of the deal to the timetable and the business details.

One of the first things a company needs to figure out is what kind of deal structure is right, Harris says. She helped put together more than 230 deals, totaling more than $1 billion when she was vice president of corporate development for Bausch & Lomb Inc.

Deal structures include supply agreements, licensing, strategic alliances, joint ventures and mergers.

BMI chose an acquisition deal with Computer System Group, buying controlling interest of the smaller company.

In a merger, it is usually the marriage of two equal companies, Harris says. In licensing, one company may let another company use its brand name on a product.

And in strategic alliances and joint ventures, two companies come together. One usually brings the products, the other the distribution network, and they join to commercialize the products.

Dennis DeLeo, a Trillium Group LLC principal who consults with start-up and early stage companies on their business strategies, says when evaluating an opportunity, a company must assess impact on revenues, cost savings, what its competitive position will be after the deal, and the ability to control or manage the company.

Smaller companies, with up to $5 million in revenues, are not initially looking at the competition, but rather they are trying to establish their business and secure revenues, DeLeo says. Many times, smaller companies are more comfortable in strategic alliances than mergers or acquisitions because they can share technologies with a larger company without giving up ownership.

Midsize companies—those with more than $25 million in revenues--are more concerned about the established or emerging competition, he says. The idea of partnering protects them from some of the competition and is a way to build a stronger company.

William Conklin, lecturer with SUNY College at Brockport's Business and Education Department, says the main reason a company makes a deal is to get capabilities another company has, such as a specialized work force or certain technology. If a company does not seek the latest technology, then it could lose its competitive advantage.

The motivation to do a deal is that the whole is greater that the sum of its parts, meaning that the newly created entity should be more profitable than the two companies taken individually, Conklin says. This can be through a combined customer base that can offer greater potential for more sales.

"Only 20 percent of the deals made end up being a total success," Harris says, adding that taking the proper steps can ensure greater success. Here is an outline of Harris' six steps toward a successful deal: 

bulletFinding the deal--Harris says statistics show that for every 100 opportunities, two deals are actually made. She says to save time and resources, it is good to recognize deal killers early.

Some examples of deal killers are taking on an environmental liability that no one wants to take responsibility for; the buyer and the seller not sharing the same vision; cultural clashes; a gap in price expectations; and a company owner not willing to pass on his or her company.

bulletThe valuation—This involves determining whether or not a deal will create value for the shareholders. Harris looks at this through the discounted cash flow, which means calculating all the cash you can ever get from the business and taking it back to today's dollars. If this figure is worth more than what the company paid for it, the deal is creating value for the shareholders.

Another way to determine valuation is to compare the company to others in the marketplace.

bulletDeciding the structure of the deal—You need to figure out if there will be a share or cash exchange, an up-front or earn-out payment structure. These negotiations also should answer guarantee, liability and exclusive-rights questions.
bulletDue diligence—This intense examination of the operational, financial and legal aspects of the company should examine whether the company is worth what it claims, if its patents are established correctly and if there are any lawsuits against the company.
bulletManaging the deal—Harris says it is important that all the drafts are read and signed off on. Consultants and the team also must keep up-to-date on financing the deal and communication with the companies, constituents, board members and shareholders.
bulletApproval process—Companies must make sure everything meets proper regulatory approvals.

Harris notes that it is extremely important to make sure those going into a deal-making situation have formal training. If the company is not equipped for deal making, it is at a disadvantage, which may affect the relationship with company dealmakers in the future.

Harris says the key to a successful deal is personal credibility. If someone does not deliver on promises as small as delivering papers on a certain day, it can affect trust in the deal.

At Harris' latest deal-making seminar, Ashland Inc.'s Distribution & Specialty Chemical Group sent employees from Columbus, Ohio, to Rochester to learn how to be better at the bargaining table. Kevin Johnson, who works on an average of seven deals a year at Ashland, fine-tuned his negotiating skills.

"There are techniques out there we are not aware of," Johnson says. "We are looking to see if there are new and better methods."

For example, Johnson and his team brought back tips on how to change the language in the company's confidentiality agreement to be more specific and spell out more protections.

Sauer says BMI is looking at more than numbers in its acquisition strategy. He believes aligning the "people side" determines an acquisition's success or failure.

Once the acquisition is completed comes the job of merging operations. If culture and human capital are not considered, this process could be brutal and expensive.

Sauer says it is important that the consolidation team have people from both sides of the acquisition. His other advice to make the acquisition work: "Be up-front and frank, and make people feel comfortable."

With the Computer System Group acquisition, being a small company helped. Sauer could spend time with everyone and explain to them "what we're doing and where we're going."

The Computer System employees were nervous at first that BMI did not have the background to make a successful expansion into digital products, but Sauer and his team were able to convince them they were ready.


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