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When it comes to cash, who you gonna listen to? Me or Warren Buffett?

Sageworks
February 26, 2013
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John Calia, SCA Group

Guest post by John Calia, partner, The SCA Group

No sooner than I said it, Warren Buffett made a liar out of me.

I wrote an article for CFO Magazine at the end of last year titled, “Three New Year’s Resolutions Every CFO Must Make in 2013.” Top of the list? Hold your cash. “Cash is a cushion in the event of a downturn driven by Middle East unrest or European Union insolvency,” said I. “Cash is protection against the impact of fiscal contraction. Cash is a hedge in a near-zero interest-rate environment.”

Well, anyone who was watching the business news knows that Mr. Buffett has offered to buy Heinz. His $23.3 billion bid for the iconic food brand was supported by Brazil’s 3G Capital and highlighted the fast start to M&A this year. Midway through February, year-to-date M&A volume was up 18 percent to $278.9 billion, with over 50 percent occurring in the first two weeks of the month, according to Thompson Reuters. 

And, it’s not just the big guys; conditions are right for M&A in the mid-market as well. A recent survey by RBS Citizens Bank reported that 79 percent of companies with annual revenues under $500 million say they have significant cash on their balance sheets. Moreover, 42 percent of companies whose annual revenues are between $25 million and $100 million reported they have enough cash to fund an acquisition of up to $2 million, according to the same survey. 

So what’s happening?  Why are companies deploying their cash all of a sudden?  And, what does it mean for small businesses?

Well, there are a couple of factors at work. First, money is cheap right now. Bank loans in support of acquisitions bear record low interest rates.  

“A unique set of factors will drive growth in mid-market M&A this year,” says Joel Magerman, CEO of Bryant Park Capital, a N.Y.-based investment bank serving the middle market. “Low interest rates and a recovering economy are critical among them.” 

Yes, it’s tough to meet bank requirements these days. However, many companies have taken steps to shore up their internal controls and reporting. What banks are looking for is evidence that your company is well managed. If your internal metrics can demonstrate what a great job you’re doing, you may be surprised at the bank’s response. 

There’s a side benefit to looking prettier for the bank. You might make more money. Improved controls mean less aged inventory, improved sales opportunity and higher margins. 

Second, we are in a slow growth economy. If organic earnings growth is not getting you where you want to go, an accretive acquisition may be just what the doctor ordered. Sounds good on paper, right? But it’s not easy to execute. 

If you’re a seller, you should have been preparing for a few years. If you haven’t, you have a lot of catching up to do. I won’t bore you with a checklist of documents you should have in order. I’ll leave that to your attorney and your CPA. The larger issue is making the company attractive to a buyer. What are they looking for?  

Simple. They want “proof of concept.”. Is your company producing a product or service that is marketable now and in the near future?  And are your customers happy with their experience with you and your staff?

Next, a buyer will want to see a management team that can run the business in your absence. That’s tough for small businesses that don’t have a management organization. But I have seen problems in larger businesses too. Entrepreneurs are notoriously stingy and controlling. Many won’t pay what it takes to get a good team in place. And others can’t or won’t delegate authority, driving good managers away. 

Last, and certainly not least, buyers are looking for a track record of growth in revenue and earnings. 

Like I said, “Simple.” Right?

What if you’re a buyer?  Well, obviously you should be looking for those factors I just outlined. But your bigger challenge once the deal is closed will be integrating your new acquisition into your company. Take a lesson from those who have done it successfully. Global networking company Cisco Systems is famous for its seamless integrations. Of course, Cisco is big enough to have a dedicated team to manage integrations. Nevertheless, there are elements of what they do that apply to all acquisitions. Critical among them:

Making sure that the payroll and benefits are on track before the deal closes

Making sure the new people feel welcome, and 

Acting on the synergies associated with the acquisition. 

So there you have it. A quick primer in M&A for the non-Buffet crowd. One more thing: experience has taught me that interest in acquisitions or acquisitions in certain industries comes in waves. When it’s your turn, don’t walk away without due consideration. The wave may not wash up on your shores again for a very long time. 

John Calia is a partner in The SCA Group, a provider of interim C-level management and strategic advisory services. He is also a partner in the McCracken Alliance and author of a blog on leadership, Who Will Lead?

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Raleigh, N.C.-based Sageworks, a leading provider of lending, credit risk, and portfolio risk software that enables banks and credit unions to efficiently grow and improve the borrower experience, was founded in 1998. Using its platform, Sageworks analyzed over 11.5 million loans, aggregated the corresponding loan data, and created the largest

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