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Keep Your Eye on the Little Guy

March 31, 2011 Finance

As we continue to slowly yet steadily move out of a depressed economy, more and more companies are once again focusing on growth.

CEOs and CFOs alike are focused on rebuilding those research-and-development budgets they once had to downsize and are looking to better their business with increased talent and new technologies.

But realizing that organic growth and big deals will still be challenging, and risky in our current economic environment, their strategy is shifting to go after younger, smaller businesses that hold the promise of future innovation.

The idea of purchasing a new market-ready product or service has particularly strong appeal since relying on in-house players to make the same accelerated R&D advances could take years.

 

Several other factors play into the buyers’ favor when eyeing the market for early-stage businesses to purchase:

  • Development-stage companies have passed the initial testing phase and are ready for prime-time use.
  • Smaller companies are more open to being purchased rather than hold out in an always-challenging market for IPOs.
  • As with the real estate industry; it’s still a buyer’s market and finance chiefs can take advantage of great deals, despite the increasing interest in acquisitions.

Despite these advantages, buying smaller doesn’t mean deals are easier.

For CFO’s, you should be prepared for a lack of historical data, disorganized finances, failure to protect intellectual properties, unclear business agendas and little, if any, initial revenue.  You should also be ready to shift your “deal-making thinking” from revenue and earnings to a focus on people and technologies.

The human-element of small-company transactions is crucial to success. Most small company entrepreneurs are used to working independently. They thrive in environments that celebrate trial and error, favor and fewer processes and constraints that normally define larger corporations. For that reason, the acquired business’s principals and employees may be your greatest risk.

As you look to expand your business, either organically or through acquisitions, Fahrenheit Finance can help with the added tasks associated with sudden growth:

  • Do you have the right people in place to be able to execute the integration of a new company or added transactions of a revenue explosion?
  • Do you have the processes in place that can handle the added volume without adding additional headcount?
  • Do you have the systems in place that can handle the increased level of transactions or the added complexity of multiple companies, product lines, etc?

Before you get too far down the path, let Fahrenheit Finance assist you in assessing the scalability of your people, processes and systems.

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