• Dell’s $3.9 billion acquisition of Perot Systems in September
• Walt Disney’s $4 billion tie-up with Marvel in August
• Exxon Mobil’s $41 billion all-stock buy of XTO Energy in December
• AIG offloading its Asian life insurance business to the U.K.’s Prudential for $35.5 billion

While these deals certainly make headlines, I don’t think they do much for main street American business and more importantly, I don’t think you can declare that merger and acquisition activity is back based on these deals alone. The article argues that these deals signal change  and explains that companies are looking to invest the cash they accumulated through the significant cost-cutting measures in 2009.

However, what the article fails to address is the significant strain many companies still feel, those that did not have the luxury of accumulating significant cash reserves through cost-cutting.  On the contrary, for many businesses, cost-cutting was not a strategy employed to accumulate cash — it was a drastic measure taken to ensure survival.  As such, these businesses are not in a position to simply spend the cash reserves to restart the engine, they need their market to rebound.

Perhaps some of the rebound can come from the larger players who have these cash reserves through a “trickle down” process.  But most of this growth will drive from continued consumer confidence and growth.  So, yes, these large deals are important to signal a sea change, but the real recovery is going to require a much larger economic and environmental change over time.

Perhaps the best nugget of the article came in the last paragraph:  “In his latest letter to Berkshire shareholders, Buffett said, ‘Directors should hire a second advisor to make the case against the proposed acquisition, with its fee contingent on the deal not going through.’ Absent that drastic measure, his advice remains ‘Don’t ask the barber whether you need a haircut.’”

I think it is important that all business people (including lawyers) be able to understand, digest and interpret basic financial statements.  If you are not familiar, I have set forth below a few key financial ratios that you can use to assess the financial health of a business:

• Quick Ratio (Acid Test):  Cash+Marketable Securities+Receivables / Current Liabilities.  This tests the short term stability of the company by determining the extent to which the company can pay its current liabilities without relying on the sale of inventory.  This test is a bit more precise that the Current Ratio because it excludes inventory and focuses on liquid assets.
• Debt to Equity Ratio:  Total Liabilities / Net Worth.  This test quantifies the relationship between the capital invested by owners and the funds provided by creditors. The higher the ratio, the greater the risk to a current or future creditor. However, an extremely low ratio may indicate that the company is too conservative and not realizing its potential.
• Gross Margin Ratio:  Gross Profit / Net Sales. This test indicates how well the company can generate a return at the gross profit level, by addressing three areas — inventory control, pricing and production efficiency.

• Return on Investment Ratio (ROI):  Net Profit before Tax / Net Worth.  This is the percentage of return on funds invested in the business by its owners and tells the owner whether or not all the effort put into the business has been worthwhile.  It is used to compare investment in the company against other investment opportunities.
• Accounts Receivable Turnover:  Total Net Sales / Accounts Receivable.  This ratio shows the number of times accounts receivable are paid and reestablished during the accounting period. The higher the turnover, the faster the business is collecting its receivables and the more cash it has on hand.

• Break Even Analysis:  While not a true financial ratio, a break even analysis is a very important tool for business people.  A company breaks even when its total revenue equals its total expenses. At the break even point, no profit has been made, nor have any losses been incurred, but the lower limit of profitability has been identified.

There are many other ratios and financial tests that can drill into other specific areas.  However, the tests shown above will provide a good start when evaluating the financial health of a business.

1. Plan Early.  The time to begin business succession planning is well before your anticipated transition.  Getting started sooner will ensure your goals and objectives can be met.
2. Commit the Time and Resources.  This process will take time and resources.  If you are not willing to commit to the process, your result will suffer.  Therefore, invest the appropriate time and resources at the beginning to ensure a successful result.
3. Engage an Outside Adviser.  There are many difficult issues you will confront while planning your business succession.  Finding a good adviser (i.e., an attorney or accountant that has experience in this area) that can guide you through the process is invaluable.  The right adviser will ease your mind and create the optimum plan to achieve your goals.
4. Invest in the People.  People are your strongest assets.  Make sure you have the right talent in place.  If you don’t, find the right talent — do not settle for second best.
5. Management v. Ownership.  Perhaps you think these go hand-in-hand, but they can easily and understandably be separated.  Often, when transitioning a business, splitting these roles is vital to the ongoing success of the enterprise.  Think about the skills of the people involved and then decided how to deal with management and ownership.
6. Understand Relationships.  Businesses are made up of people.  Understand that decisions you make on transition matters will have ripple effects on many of the key people in the business.  Make sure you understand how the  unintended consequences of the decisions you make may effect the key people in the organization.
7. Look at all Options.  In devising your succession plan, you will be faced with numerous choices and decisions.  Make sure you look at all possible options before making a decision.  While this may seem overwhelming, you only get to transition your business once, so make sure you do it right.
8. Tax Strategy.  This is one of the most important and tricky areas to address.  Make sure you have a well qualified tax adviser available to assist.  The consequences can be extreme, so proper planning in this area is vital.
9. Integrate with Estate Plan.  For many business owners, the business represents a significant part of their net worth.  Therefore, it is very important to integrate your estate planning with your business succession planning to achieve a comprehensive result.
10. Plan for the Unexpected.  The only thing that is certain in planning for the future is that things will happen that you did not plan for.  Unforeseen circumstances may alter your plan, so make sure you consider alternative strategies and make sure you have flexibility in your plan to account for the unexpected.

Although these tips will get you started down the road to effective business succession planning, the list is not exhaustive.  There are many other issues that need to be addressed as you build your succession plan.  At a high level, the most important thing to keep in mind is to build a solid strategy and stick to that strategy as you move through the transition.  You don’t have to tackle this project alone — engage the right resources to help you through this milestone.