6.IMPROVING OR COMPLETING A PRODUCT LINE – this approach has several elements from other acquisition strategies. Successfully adding new products to a line improves profitability and revenue growth. Giving a sales force more “arrows in their quiver” is a powerful growth strategy. You take advantage of your existing sales and distribution channel (strength). You may be able to improve your competitive position by simplifying buying process - providing your customers one stop shopping. You have already established momentum and credibility with your installed accounts and it is far easier and cost effective to sell them additional products than it is to win new customers.

7.TECHNOLOGY – BUILD OR BUY? This is a quandary for most companies, but is especially acute for technology companies. Acquiring technology through acquisition of another company can be an excellent growth strategy for several reasons. First, R&D costs are generally lower for these smaller, agile, more narrowly focused companies than their larger, higher overhead acquirers. Secondly, time to market, window of opportunity, first mover advantage can have a huge impact on ultimate success of a product. It has been said that Alexander Graham Bell arrived four hours before another inventor at patent office for essentially same invention. If there is a good idea or a market opportunity, most likely it is being pursued independently and simultaneously on several fronts. First one to establish their product as “standard” is big winner. I sure would not want to try to displace Microsoft Windows as operating system for PC’s.

8.ACQUISITION TO PROVIDE SCALE AND ACCESS TO CAPITAL MARKETS – In this area, bigger is better. Larger companies can generally weather a storm better than smaller companies and are considered safer investments. Larger companies command larger valuation multiples. Some companies make acquisitions in order to get big enough to attract public capital in form of an IPO or investments from Private Equity Groups. Many smart business owners have consolidated several smaller companies at lower multiples to create a larger company that investment community valued at higher multiples. This can be a very effective grow to exit strategy.

9.PROTECT AND EXPAND MATURE PRODUCT LINES - I recently came across an outstanding example of execution of this strategy. Johnson & Johnson, multi-billion dollar pharmaceutical company in 2000 acquired Alza Corporation, maker of drug delivery systems and devices for what appeared to be an unbelievably steep price of $13.7 billion, or 23 times year 2000 revenues. They are inventors of transdermal patch used in products such as NicoDerm CQ. They have developed time released pills that can, for example deliver Ritalin, drug for attention deficit disorder in children, at prescribed times with one dose. They have developed an injectable titanium stint to deliver cancer medication over course of a year. Why would J&J pay so much for this company? Here is strategy. The latest price tag for getting a major new drug through FDA and to market is a whopping $800 million. These delivery technologies can turn J&J’s old drugs into new best sellers that are re-patentable at a far lower price than new drug development. An added benefit is that they can do same for off patent drugs from other competitors.

10.PROTECT CUSTOMER BASE FROM COMPETITION – The telephone companies have done studies that show that with each additional product or service that a customer uses, likelihood of customer defecting to a competitor drops exponentially. In other words, get your customers to use local, long distance, cellular, cable, broadband, etc and you will not lose them. Multiple products and services provided to same customer dramatically improve retention rates. At risk of repeating myself, it costs ten times more to get a new customer than it does to keep one.

11.ACQUISITION TO REMOVE BARRIERS TO ENTRY – An example of execution of this strategy is a large commercial information technology consulting firm acquiring a technology consulting firm that specializes in Federal Government. The larger IT Consulting firm had valuable expertise and best practices that were easily transferable to government business if they could only break code of vendor approval process. After many fits and starts to do it themselves, they simply acquired a firm that had an established presence. They were able to then bring their full capabilities from commercial side to effectively increase their newly acquired government business.

12.OPPORTUNISTIC ACQUISITION FOR WHEN THE MARKET TURNS – as they taught me in business school: buy low and sell high. Well-run businesses often will buy competitors that bring many of benefits from above at very favorable prices when times are tough. They buy customers, new geographies, technology, management talent, etc. at less than strategic prices because they have staying power to last through a market downturn. Buying a company that doesn’t fit at a bargain is ultimately not a bargain if you are unable to integrate to make your core business more powerful.

Larger firms with lots of resources have established business development offices to execute corporate growth strategies through acquisition. These experienced buyers search for companies that fit their well-defined acquisition criteria. In most cases they are attempting to buy companies that are not actively for sale. If a strategic company is for sale and is being represented by an M&A firm, M&A firm’s job is to sell that strategic value to marketplace. If properly done, buyers are competing with several other buyers that recognize strategic value and price tends to be bid way up. The win for successful corporate acquirer is to target several candidates that have many of characteristics from above, buy them at financial valuation multiples (traditional valuation techniques like discounted cash flow or EBITDA multiples), integrate to strength and achieve strategic performance.

The form of seller’s organization, for example C Corp, S Corp, or LLC are important to consider in a business sale. In a C Corp vs. an S Corp and LLC, gains are subject to double taxation. In a C Corp sale gain from sale of assets is taxed at corporate income tax rate. The remaining proceeds are distributed to shareholders and difference between liquidation proceeds and stockholder stock basis are taxed at individual’s long-term capital gains rate. The gains have been taxed twice reducing individual’s after-tax proceeds. An S Corp or LLC sale results in gains being taxed only once using tax profile of individual stockholder.

Selling your business – tax consideration checklist:

1.Get good tax and legal counsel when you establish initial form of your business – C Corp, S Corp, or LLC etc. 2.If you establish a C Corp, retain ownership of all appreciating assets outside of corporation (land and buildings, patents, trademarks, franchise rights). Note: in a C Corp sale, there are no long-term capital gains tax rates only income tax rates. Long-term capital gains can only offset long-term capital losses. Personal assets sales can have favorable long-term capital gains treatment and you avoid double taxation for these assets with big gains. 3.Look first at economics of sales transaction and secondly at tax structure. 4.Make sure your professional support team has deal making experience. 5.Before you take your business to market, work with your professionals to understand your tax characteristics and how various deal structures will impact after-tax sale proceeds 6.Before you complete your sales transaction work with a financial planning or tax planning professional to determine if there are strategies you can employ to defer or eliminate payment of taxes. 7.Recognize that as a general rule your desire to “cash out” and receive all proceeds from your sale immediately will increase your tax liability. 8.Get your professionals involved early and keep them involved in analyzing various bids to determine your best offer.

Again, purpose of this article was not to offer you tax advice (which I am not qualified to do). It was to alert you to huge potential impact that deal structure and taxes can have on economics of your sales transaction and importance of involving right legal and tax professionals.