A New Book Targets Small Companies for Accelerated Growth, Florida Corporate Finance.

ORLANDO, Fla. -- A new book published just last month shows that acquisitions are not only for giant corporations. H. Lee Rust, author of "Let's Buy a Company: How to Accelerate Growth Through Acquisitions," explains that even small companies can use acquisitions to increase sales and profits at a rate far in excess of internal growth.

In a recent seminar, Mr. Rust asked, "How long will it take you to double the sales and profits of your company? How about four to six months? Impossible? No," he explained, "it can be done with a single acquisition, a growth strategy that many company owners don't consider but should."

Mr. Rust went on to explain his "95% rule." Ninety-five percent or more of all companies in the U.S. are run for only one reason: to produce personal compensation for their owners. "I call these 'lifestyle' companies," Mr. Rust said. "If the earnings provide the owners with a comfortable lifestyle, that's all they ask."

The other five percent or less, perhaps substantially less, are run to build value for their owners. These five percent, as they execute their growth plans, end up acquiring many of the other ninety-five percent.

"You can graduate from the ninety-five percent category," Mr. Rust said, "and join the five percent of rapidly growing companies that are building value. At the same time, you can significantly increase your personal compensation from the business."

Many company owners don't understand that the operating methods for maximizing personal compensation or for building net worth are not mutually exclusive, they're only different. To maintain a lifestyle, you only need to do about the same thing every day. To build value, you need to think beyond your normal activities and consider additional facilities, geographic expansion, and new but related markets. All of these can be accomplished with acquisitions.

For either a single acquisition or a continuous acquisition program, there are only three absolutely required elements:

1. There must be something to buy. That might sound ridiculous, but if you want to move into the Memphis market, for instance, where there are only two competitors in your industry, if they both say "no," there's nothing to buy. If there are 35 candidates, as there were for a recent search Mr. Rust did in Atlanta, your chances of completing a purchase are excellent. The easiest acquisitions are done in a fragmented industry with a large number of relatively small participants. The exception to that rule is the purchase of a single competitor or target that you know to be available. That definitely gives you something to buy.

2. You must be able to manage what you buy. Operating a remote facility or several subsidiaries is quite different from the management of a single location. For a successful acquisition, your company should have sufficient management depth to not only assimilate the acquisition but also assure its continued profitability as a part of your operation. This does not mean that all of the needed people and control systems must be in place prior to an acquisition closing; part of both can often be found in the acquired operation rather than the parent.

3. You must also be able to pay for what you buy. The price, payment terms, and subsequent cash flow of an acquisition will have an enormous impact on how your company might finance a purchase. You will, however, need resources sufficient not only to close the transaction but also to make necessary working capital and other contributions to the acquired company's operations and future growth.

"In determining how much you can afford to pay," Mr. Rust said, "and therefore an appropriate target size, you should carefully assess your company's financial strength and your appetite for risk. Add to these a thorough evaluation of the historical financial results of the target company. Then use this information to develop pro forma statements showing the past results with adjustments made as if the target company had been owned by yours during that period."

Based on these historical and pro forma financials, you can then develop projections factoring in the acquisition financing and its terms. The best acquisition will largely pay for itself from the target company's own earnings. Properly structured, this can often be done and still meet the price requirements of the seller.

In any acquisition, either a known target or one from a search in a new market area, look for these three elements. If they're all in place, your external expansion plans through acquisitions are likely to be successful.

"In considering an acquisition strategy," Mr. Rust remarked, "remember that even giant companies began as only a single, relatively small operation not dissimilar from your own. You can generate significant rates of growth with an acquisition strategy added to your normal plans for internal growth from new customers and increased market share."

Lee Rust has been a corporate finance consultant for over 25 years helping clients buy and sell companies. In addition to his new book "Let's Buy a Company: How to Accelerate Growth Through Acquisitions," Mr. Rust also writes a monthly newsletter on acquisitions and general business topics. [e-mail]