Finding a good business to acquire

 This information is primarily for the individual or small business owner seeking to acquire a company. While not aimed at the corporate buyer, there is relevance here also. This newsletter is a little longer than normal, as I want to be comprehensive and because it is a very timely topic.

 The economic conditions of early 2001 mean there are more business buyers on the street. More buyers mean more competition, bad news for buyers and possibly good news for sellers. Why only possibly? Because novice buyers can drive a seller nuts. Not knowing what to do, how to do it or what to do with the information drags out the process and/or raises false hopes. A frustrated seller may blow off their best buyer prospect because of a recent bad experience.

 Define criteria

 The criteria of what to search for involves more than the type of business. A buyer should define the:

 ·         Location

·       Size based on sales or employees

·        Cash flow (owner salary and profit, making allowances for depreciation and anticipated capital expenditures)

·         Opportunity for continued growth and profits

·         Cash available for a down payment, closing costs and working capital

 There are incredible niches out there. Most buyers I’ve worked with buy a company doing something they never imagined when they started the process. These firms are usually unglamorous and very profitable.

 Know whether you are buying a job. There is nothing wrong with buying a job, as long as you don’t do so when your goal is to take something to another level or two. There are plenty of companies that provide and excellent income, secure lifestyle and will increase your net worth but yet don’t have the opportunity for rocket ship growth. These firms have manageable risk, which means a smaller upside and a smaller downside.

 Play the field

 Too many buyers limit themselves to what is available in the public market. The public market is companies listed with brokers, advertised in the paper or on the Internet. Buyers network a little, but it’s usually ineffective.

 There are pros and cons with listed businesses. On the positive side, you have a motivated seller. If the broker requires a commitment fee to prepare and package the business, it often means less “seller remorse.”

 Intermediaries can be a tremendous aid in helping with deal structure and in keeping the seller focused on the right issues. They also have financing connections with lenders who know them and trust their deals (based on the deals they’ve done).

 On the other side, brokers only have a limited number of listings. If the business “isn’t you,” don’t try to fit your round peg into their square hole. There is also the matter of competition. A broker’s job is to find as many buyers as they can for their client, the seller. When they do a good job, they create buyer competition. Nothing wrong with that, especially for the seller!

 Often (but not always) owners take the business to the public market as a last resort. They check with their friends, accountant, attorney and banker. If their advisors don’t feel the business is strong enough to refer a client to, they go public.

 Business buyers should determine which brokers specialize in the type and size they’re interested in and stay in constant contact with that broker. New listings arrive regularly and if you’re first in line you may find that gem before anyone else has time to get serious.

The other option