I hope you all are back to work energized and ready to tackle 2014. As I have been saying in this column for quite some time now, we all need to be optimally flexible, plan for multiple business contingencies and reinvent our business practices to deliver more client value than ever before.

However, I’ve also observed that a number of you seem to be beyond the reinvention stage of your lives and not prepared to commit the time, energy, emotion and capital to reinvent your business right now. Consequently, a number of you are beginning to contemplate a merger or sale of your business.

But how do you go about finding an ideal merger candidate? Selecting the best partner requires exploring the attributes of an ideal merger candidate. The strengths and opportunity areas of your business will determine the potential contender for your business. Evaluating possible candidates is also about finding business partners that have complementary practices. All of this is to say that it’s important that both businesses benefit from the merger in the end, having not spent time or money on building an entirely new entity.

The right questions
One place to start is with firms that you already know, whether they are friendly competitors or businesses that may have some synergies with your own practice. Think about the following: Do you market complementary product sets? Do you serve different markets? Does each team possess expertise in a different business discipline? And do your strengths and weaknesses complement each other? Having the same weaknesses could be a formula for disaster. Perhaps the partnering firm has a desirable proprietary technology that would improve efficiencies or facilitate the opening of a new sales channel. Or it could be that both firms do not have much management bench strength.

The combined two businesses might be quite strong and multi-faceted with great domain expertise. Are the business models, marketing strategies, compensation plans, producer contracts and corporate cultures compatible? And the list goes on.

You also need to realistically consider what your business is worth as a starting point for any discussions with third parties. There are several components of market value: enterprise value (brand, goodwill, strategic synergies), value of new business (greater valuation for high growth), value of renewal business (discounted value of future earnings) and adjusted net cash flow. The starting point is actually that last item, adjusted net cash flow, including put-backs for personal preference items. You should be thinking double-digit compounded growth if you expect to command a premium to market value in any merger discussions.

And finally, the enterprise value takes into consideration certain intangibles, like those mentioned above, and proprietary products or technologies or other critical differentiators. Recognize that there is the potential for a valuation gap to exist. What you think your business is worth needs to be realistic and reasonably defensible. And the same is true for any potential merger candidates and their expectations about the perceived value of their business.

You likely will need professional advice to succeed. So, if this is the year for you to merge, start thinking strategically.

Kwicien is managing partner at Baltimore-based consulting and advisory services firm Daymark Advisors. Reach him at jkwicien@daymarkadvisors.com.

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