Dark Times Strategy (con't)

Buying or merging with another company is a possible solution to revenue and profit problems. When two companies get together they benefit from new economies of scale. That means that the new entity can shed expenses that were being duplicated at the other company such as rent, the phone system, utilities, insurance, probably some employees and the like. The two combined companies now create more profit than the two did standing separately. This is expressed in the Acquisition Formula of 1+1=3. Rather, one plus one must equal three for an acquisition to make sense and provide each company with more benefit than they had standing separately. Put another way, you wrap a ketchup and mustard soaked bun around a hot dog which , in turn, creates a much tastier product than the bun or dog alone. You get the idea.

The new cash flow coming from this can be split by the two companies or it can be used to finance the purchase of one company by the other. Usually some owner financing is involved, especially these days. Maybe there is a bank loan for half the purchase price and then the owner takes back a note for the rest over 5-10 years. Selling prices vary some but here is the formula that will be pretty close. Take the recasted company, that is, how it will look once it is absorbed, and multiply its new annual profitability, usually with all owner's take out of this too, by 3.5. It comes out close to about half of your annual revenue.

Two owners rarely get along so plans should be made for one to turn things over to the other after a six month transition period. The most likely companies to merge with would be one in your own field but an acquisition also is a means for one company to enter a new field that it previously did not have the expertise to do but now does with its new purchase. In an acqusition it is good to keep in mind the definition of a good deal. A good deal is one that is good for both parties.