SMALL
BUSINESS MERGERS AND ACQUISITIONS
Abstract
Many
small business organizations prefer using mergers and acquisitions as a method
of salvaging their businesses that are about to go extinct. Others use it as a means
of gaining control over another business. These firms need to know the right
steps to take in order to be successful in the process. They also need to adopt
the right valuation methods and procedures so that they can end up with the
right business. Research shows that there are ten important steps for firms to
follow during the process of merger and acquisitions. They also need to use the
available eight methods of valuation approaches for businesses in mergers and
acquisitions in order to end up with the right type of businesses. This paper examines
all these steps and methods in an in-depth manner to help the firms know
exactly what they need to do.
Steps
Involved in Mergers and Acquisitions of Small Businesses
Background
Small businesses refer
to those companies that have fewer employees than hundred. Some countries have
their own methods of categorizing businesses as either small, medium sized or
large business organizations. Mergers and acquisition refers to a combination
of two businesses that were formerly operating individually to start carrying
out business activities as one (Miller 2011). Many small business ventures
would like to acquire other businesses and operate in a merger and acquisition
basis, but they encounter various obstacles.
Steps
in mergers and acquisitions
The first impediment
that the organizations face is the ability to acquire or merge with other small
firms in a troubled economy. Aside from this, many owners of companies that
would wish to acquire other businesses also lack the knowledge of appropriate
steps to take in the process. Apart from being able to know the steps involved
in mergers and acquisitions, they should also be able to carry out effective
evaluation of the businesses that they want to work with. Evaluation is
important as it provides all round information about the business, and its
operations.
An article written by
Snow (2011) indicates that there are ten steps for small business owners to
follow so that they can make successful merger and acquisition processes. The
first step is to make a list of targeted buyers and sellers. Secondly, the firm
should communicate with the targets through phone calls or one on one visit to
their premises. The business should receive or send a teaser, which if a
document that has the right information about the business that the buyer or
the seller would like to know. Both the firms agree to keep the conversations
about the merger and acquisition process confidential by signing a confidentiality
agreement. The firm should receive or send a confidential information
memorandum (Snow 2011). This document tells the buyer everything about the
organization. The information on the CIM includes types of products, history,
customers, and any impending debts.
The sixth step involves
getting the indication of interest (IOI) from a buyer, which expresses the
buyer’s interest on sealing the deal. This also comes with valuation
information instead of the exact price of the firm. After this step, the buyer
and the seller conducts a management meeting in which the two parties meet face
to face in an attempt to iron out any differences, and come to a concrete
understanding (Snow, 2011). After this meeting, the firm may submit or ask for
a letter of intent (LOI). They should then conduct due diligence, compose a
purchase agreement, close the business deal and perform any post closing
adjustment and integration on the business.
Valuation
methods
Organizations
may use valuation approaches for mergers and acquisition businesses to ensure
that they acquire a business that is still at the top of its operations, or one
that can be salvaged by using effective business tools such as human resources
or marketing. The seven steps of valuations include discounted cash flow
approach. This method values the company by calculating its present value over
its life (University of Virginia 2010). A firm may valuated using market
multiples of peer firms approach, which is a method of valuing the firm based
on similar publicly traded companies. Book value method of valuation refers to
the estimation of a company’s worth based on its ongoing accounting procedures
and is suitable for firms without intangible assets.
Liquidation
value method is an approach for calculating the price of a firm based on the
sale of its assets. It is suitable for companies with financial distress.
Replacement cost approach, is the method that values a firm based on its
current worth especially during inflation period. Market value of traded
securities is a method used by estimating equity of the firm’s stock price
multiplied by its outstanding shares in the industry (University
of Virginia 2010). Finally, comparable transaction multiples refers to
valuing the firm based on the numbers of its transactions per given business
period.
The methods of valuation are deemed important to any
business that wants to enter the merger and acquisition process because it
reveals the types of operations that the intended business deals with. The
buying business will know the type of business they are taking or are about to
collaborate with in terms of finance, debts, and methods of operations. They
are able to know the clients from the organizations, what the clients like and
how they behave during business hours. Such information is very important as it
makes it possible for the buying organization to know how to handle the
customers in order to maintain and both lose them. Valuation procedures reveal
other factors such as the types of human resource in each firm, what the human
resources likes and the type of leadership styles that works for them. The
firms also know how to motivate their new employees to ensure that they perform
optimally. For the case of collaborating companies, they will be able to work
out a common ground on how to approach employees from each side with the aim of
ensuring that each firm gains from the collaboration
It is worth noting that mergers and acquisition are usually
not easy to achieve, especially when one company inherits another firm together
with all its employees. This is because they must learn the new employees, work
out how the firms can work together for profitability and how they can
harmonize their collaboration to fit each side of the firm
Aims and Objectives
The
aims and objectives of the study are to find out the steps that small
businesses have to go through before they can be involved in any merger and
acquisition. The study also aims at looking at the methods of valuation that
can be used by small businesses during the process. It also states the type of
documents that the firm must have during the merger and acquisition process.
Research
Question
Based on the above background,
aims, and objectives, the following central research question is formulated:
“what steps and procedures can small business owners use in the process of merger, acquisition and
evaluation procedures?
The central research question will
be answered through the following sub-questions:
What
are the ten steps involved in small business merger and acquisition process?
What
methods can these firms used to evaluate their target businesses?
Why
are the steps in 1 and 2 above important for the merger and acquisition
process?
Theoretical Relevance
Research done by Miller
(2011) has provided proper explanation of the processes or steps that small
business firms needs to take during mergers and acquisitions. On the other
hand, University of Virginia (2010) also provided and in-depth study and
explanation of the various approaches that firms may apply for evaluating other
companies during mergers and acquisitions. These two documents offer effective
reading in these two areas.
Hypotheses 1:
Proper knowledge of mergers, acquisitions, and valuation steps has positive
impacts on the process for small business organizations.
“(X) – steps in
merger and acquisitionis positively
related to (Y) – the acquisition process”
Hypotheses 2:
the knowledge of the valuation method of small business mergers and acquisition
is important for firms that want to be involved in such procedures. The
mediator for this section refers to the steps to be take in merger and
acquisition procedures
Conceptual model
Hypothesis
1
Steps of merger and acquisitions
X Y
Knowledge of steps
Success in mergers and acquisitions
Mediator
Hypothesis
2
Methodology
and data sources
Research Design
The research intends to use a survey
method of study to collect data for the research. The researcher will also use
structure interviews and case studies to help in data collection and research
stages. These three approaches are important to the researcher because they
give in-depth information about the study. The main concern of the researcher is
to collect reliable data that can be used for future references. The only way
to perform this is by having a one on one interviews coupled with case studies.
Method
Type
Respondent
Reason(s)
Survey
Focused surveys
Firm managers
The smaller the number the higher the accuracy and
reliability of resultsIt is anonymously taken and has higher chances of
responses with reliable answers
Structured
interviews
Non standardized face to face interviews
Managers and employs
For confirming survey resultsTo help structure survey questions betterTo provide more effective background information
about the firm
Case studies
Single case
–
Makes it easy to define the actual caseProvides a rich background on mergers and
acquisition in small business organizations
Table
5.1: Research design
Sample Strategy
The research intends to use the
self-selection sampling strategy because it best represents the entire
population. The study uses six firms that are involved in the merger and acquisition
forms of business and five that are not operating in the same way. Random
sampling is appropriate for this study because it will provide the researcher
with an unbiased sample for the study. It will also provide the opportunity for
the researcher to be fully engaged in the sample selection process as it
provides more knowledge on how to handle the sample during the actual research
phase. However, the sample will be based on convenience due to limited time,
resources, assistance, and availability of the participants.
Technique
Size
Reason(s)
Self-selection through Random
sampling
11firms
One manager from each company and 7 employees from
every firm
Provides a chance to interview all the selected
participants in the sampleIt is less time consuming
Table
5.2: Sample strategy
Data Collection
Data will be collected by surveying the
managers of firms involved in mergers and acquisitions. This will make it
possible for the researcher to interview the managers in person and have an
informed concept about mergers and acquisitions in small business firms. Further
data will come from data triangulation and secondary materials such as books
and business journals. Data triangulation will give more information on the
history of mergers and acquisitions among small business organizations. This
will also be used as a baseline for harmonizing the primary and secondary data.
These two methods of data collection are important as it helps in closing the
gap between old and new methods of merger and acquisitions in small firms.
Concept
Definition
Dimension
Measure
Quantity
of small businesses in mergers and acquisitions
The degree in mergers and acquisitions
Quantity of mergers and acquisitions refers to the number
businesses currently falling in this category (University of Virginia 2010)
The rate at which small businesses take part in
mergers and acquisitions (Miller, 2011)
–
–
– the number
of mergers and acquisition firms
– firms not in mergers and acquisitions
Use business journals to
find out the number of M&As within the small business industry
Table
5.3: Operationalization of Concepts
Data Analysis
One of the best methods of analyzing
the collected data is by using quantitative methods. This is because the survey strategy
allows collecting quantitative data, which can be evaluated quantitatively
using descriptive and inferential statistics. The collection of quantitative
data resulting from the surveys will be analyzed using tests. Quantitative data
also give a clear figure of the number of businesses operating in M&As
The collected data will
also be analyzed based on its applicability and use by various organizations using descriptive and
inferential statistics. The research will attempt to quantify the
number of organizations that have used the steps stated in the theoretical
section. The study will also find out their levels of success in the area.
Limitations
Due
to time constrains, it might be difficult for the researcher to reach out to
many firms that actually use the procedures of business mergers and
acquisitions. Secondly, it might be impossible to implement the procedures in
upcoming firms due to lack of enough time. Lack of enough resources for the
researcher to use may also pose challenges during data collection process and
may limit the number of firms, stakeholders, and employees to interview. This
will also reduce the number of case studies to be conducted. Therefore, this
study will use a convenient sample randomly chosen to meet the constraints of
time, assistance, resources, and availability of the managers. However, this
will affect the internal validity of the results.
Research Quality Indicators
The success of this research and its
quality depends on its ability to find out all the necessary steps required by
small businesses during mergers and acquisitions. The ability for firms to use
these steps and methods successfully will indicate the quality of the research.
The reliability and validity of the research will also provide quality
indicators for the research. Validity and reliability of the data depends on
the fact that the researcher used quantitative data collected through surveys
and interviews with stakeholders and employees. Similarly, the success of the
surveys, case studies and interviews adds to the quality of the data.
Outline
expected outcomes:
Small business firms with the knowledge
of the right steps to follow during mergers and acquisitions process always end
up making the right decisions. Similarly, those organizations that know the
effective valuation methods also wide up with the most stable businesses that
can make profits for them. They are able to successfully merge and acquire the
firms and uphold the organizational cultures, behaviors, and values that foster
competitive advantages and profitability.
Provisional Table of Contents:
Keywords and Abstract
List of Figures and Tables
Introduction
3.1
Conceptual Introduction
3.2
Aims and Objectives
3.3
Practical and Theoretical Relevance
3.4
Research Questions
3.5
Thesis Structure
Background: mergers and acquisitions
steps for small business organizations
Background: valuation methods used by
small business organizations
Background: success in organizations
Background: organizations that have used
the methods and steps success fully
Methodology:
8.1
Research Design
8.2
Participants
8.3
Data collection
8.4
Data Analyses
8.5
Research Quality Indicators
Findings
Discussion
Conclusions and recommendations
11.1
Research Conclusions
11.2
Recommendations from Research
11.3
Recommendations for Future Research
Glossary
Appendices
Bibliography
References
Miller, E., 2011.
Mergers and acquisitions: a
step-by-step legal and practical guide. New York, NY: John Willey & Sons
Sharman, T.,
2011. Mergers and acquisitions from A to Z. New York, NY: John Willey & Sons
Snow, B., 2011. Steps of the M&A Process. Retrieved
from http://www.dummies.com/how-to/content/steps-of-the-ma-process.html
University
of Virginia., 2010. Methods of valuation for mergers and acquisitions.
Retrieved from http://www.keyvaluedata.com/pdf/articleOfInterest/3513.pdf
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