Set Sale

Last year was a good one for wheelers and dealers, as M&A activity reached $1 trillion, up from $824 billion in 2004. This year's numbers are expected to surpass that, assuming interest rates remain relatively low. But is this particular rising tide lifting all boats? More specifically, is now a good time for entrepreneurs to either cash in their hard-won profits and positive cash flow by selling for a pretty penny or use their own surplus to acquire a smaller company that might help them expand?

Eric Gebaide, managing director of Innovation Advisors, an investment banking firm in New York City that focuses on the middle market, says it is. He notes that while they don't get the same media attention as the major mergers, acquisitions involving smaller companies accounted for a significant portion of the 10,700 transactions rung up in 2005. "When you say the M&A market is robust, it is that $20 million [and below] deal size that has been the most robust," he says, adding that technology, medical devices and manufacturing have all been especially busy industries.

Indeed, with many industries rapidly consolidating and big companies scouting for solid buys, now may be an especially good time for entrepreneurial businesses with several years of strong profits and growth behind them to find the partner they've been looking for. Those with a specific technology or that are in a niche market that larger companies want to expand into will be in demand, says Larraine Segil, an expert in business alliances and a partner with Boston-based Vantage Partners, a negotiation and relationship management training firm. "When the market is up for acquisitions, as it is now, those kinds of targets can get a higher premium because there might be a bidding war," she says.

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But Segil and others caution that a higher price tag is not the only factor in the decision to merge, and many deals fail because executives are mainly focused on business considerations and economic justifications while they neglect critical cultural and compatibility issues. It's a mistake that the founders of Navigator Systems had long been determined to avoid as they considered--and ultimately rejected--various suitors over the past decade. "The valuation has to hit some minimum threshold," says Todd Price, 38, co-founder of the corporate performance management consultancy in Addison, Texas. "But from a small-business standpoint, there are other things that kicked in for us that were as important."

In March 2005, however, just as the M&A boom was getting into full swing, Hitachi Consulting, the global business and IT consulting arm of Hitachi Ltd., came knocking. After months of talks and careful due diligence, Price and his partner, Jon Feld, 39, decided the fit was right--financially, strategically and culturally--and this past February, they closed the deal. They joined Hitachi and took all their 95 employees with them, something they say points to the merger's success. "Some entrepreneurs may consider selling their company at the end of the road or as a cash-out strategy," says Price. "But for us, selling the company has always been thought of as just the next chapter in our evolution."

For those who see acquiring as their next step, entrepreneurial businesses may find a slightly favorable environment thanks to low interest rates, but they will still face hurdles when raising capital, says David Stone, a partner with Chicago corporate law firm Neal Gerber Eisenberg LLP. "And they don't have the same currency in the form of stock to use to acquire other entities," he says. That said, if an entrepreneur sees the right opportunity to expand and has accumulated the extra cash or has access to capital to make it happen, now might be a good time to jump in. "There are some economic challenges out there," says Stone, "but it's still a good time to look at doing these deals, because generally, the economy is moving forward at a pretty healthy clip."