Greater Rewards

Although the current economic climate presents significant challenges for some businesses, it is an opportune time for well-managed and well-financed companies to consider a strategic acquisition that will position them for growth.

There are a number of companies on the market for sale, and while there may be many attractive deals, carefully assessing a potential acquisition is critical. When it comes to the building and construction industry, risk is part of the equation. The hallmark for this sector has traditionally been that the greater the risk, the greater the reward. However, with today’s volatile market, investors should reassess this historical mantra. While there is no simple formula for approaching a potential acquisition in a distressed market, the following five steps should be considered when investing in an acquisition.

Understand Your Risk Tolerance

It is critical to understand your risk tolerance to ensure you obtain the appropriate risk/reward balance. Conducting a thorough internal assessment of your management strengths and operations will allow you to determine all available options. You also need to be aware of external factors such as availability of capital, cost of capital, and local, national and global industry trends. 

You should also analyze your current capital structure and consider either raising debt or equity capital in order to build financial positioning to execute on the transaction. The key to both options is to ensure you are not taking on more risk that could negatively impact your core business. When assessing options, you must also consider the impact on ownership dilution.

 Acquiring a distressed company often demands quick decision-making, and thus reduces the time allowed to perform appropriate due diligence. When that happens, you must weigh the potential risk that goes along with rushing the transaction. If the purchase price or terms and conditions in the agreement cannot be adjusted for the related risk, sometimes the best move is to simply abort the transaction. It is also important to have a full understanding of your own growth limitations. If, for example, your road to future success lies in expanding geographically, but the capital and time commitment of setting up your own operation is too high, then an acquisition strategy may be the ideal approach.

Find the Right Opportunity

During tough economic times, many tend to view acquisitions as the practice of acquiring a business in distress – this is far from being the case. In fact, the “bargain basement” approach often carries with it more risks than rewards over the long term. However, with a well-defined strategic plan, and a keen eye for the right opportunity to complement an existing business model, an acquisition can prove to be the deciding factor in overcoming any growth hurdles a business may be encountering.

 For those with a well-defined plan, acquiring the right distressed and discounted assets can prove to be a beneficial strategy that can accelerate your path to growth. For example, you can obtain greater market share by purchasing a competing business at a great price. This strategy can also allow you to diversify assets if you are seeking to expand your portfolio either geographically or by asset mix (e.g. commercial, retail and residential).

Develop a Plan

Every deal you are considering should start with a coherent and well-defined plan that will show how the transaction would generate value to your existing business. This plan is referred to as the investment thesis and clearly sets out the understanding of how profit will be generated and outlines how adding the assets to your portfolio will make your business more valuable.

 Value creation is typically defined as the ability to increase cash flow beyond the level of cash the owner requires to compensate for the risks the business presents. Sustainable value creation can only be achieved by distributing enhanced value over all key stakeholders, including owners, customers, employees and suppliers.

Perform Due Diligence

Building sector professionals know that before you close any deal, you need to perform some level of due diligence. But what does due diligence entail? What are the best practices? Can you do it yourself or should you hire a firm that specializes in buy-side advisory services?

 Risk exists everywhere and sound due diligence can help protect you by providing the necessary information and enabling you to make informed decisions. Although you may have an in-house due diligence team, consider engaging professional advisors when undertaking major acquisitions. 

Due diligence is customized to each individual transaction and takes a focused look into a number of areas, including the quality of earnings, quality of assets, potential tax exposures and liabilities. You must always keep in mind that although the asset itself may be strong, if the capital structure is weak, it could place you in a distressed situation.

Design a Solid Acquisition Structure

How you structure your proposed acquisition from a tax standpoint is an important consideration. You could structure your acquisition through a corporation, a partnership, an individual purchase or using a trust. Each of these structures has different rules on how and at what rate the income from the investment will be taxed, and each has different benefits or consequences depending on your needs.

 Before you determine what structure works, consider implications such as whether the income will be taxed at personal or corporate tax rates, whether start-up losses may be trapped in a corporate structure or if such losses could  be passed through a partnership.

 If you are financing the purchase, how the debt is structured will affect how the profits are taxed. Depending on your goals, there may be alternative tax structures such as a family trust that can be used to minimize taxes. Also, bear in mind that how a property is purchased will have tax implications when you sell. A professional services firm specializing in real estate will know how to structure the transaction. In today’s uncertain climate – or even when the financial landscape is thriving – no acquisition is without risk. However, with a well-thought-out strategy and the right expertise on hand, healthy businesses can significantly reduce those risks and drive stronger, more profitable results.  

Jonas Cohen  is managing director of Fuller Landau Financial Advisory Services and leads Fuller Landau’s merger and acquisition, corporate finance and due diligence practices.  Fuller Landau is a leading mid-sized audit, tax and advisory firm committed to helping entrepreneurs build value and grow their business. For more information about Fuller Landau, please visit www.fullerllp.com.

Check out our latest Edition!

 

  Click here for the archives!

alan blog bcca

Contact Us

Building and Construction Canada Magazine
6380 Wilshire Blvd.
Los Angeles, CA 90048

  323.988.8210
  323.988.8201

Click here for a full list of contacts.

Latest Edition

Spread The Love

Back To Top