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.
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
Find companies before they hit the public market. Network effectively; there are specific strategies that can improve your results tremendously. Define what you want and use a combination of referral, letters and telephone calls to get in front of owners.
The good situation is to find the owner who is thinking about selling. A better situation is to find an owner who just experienced one of the three D’s a buyer looks for. Divorce, death or disability (or any other catastrophic event that forces an owner to sell sooner vs. later).
Directly contacting owners can be your best strategy or your worst, depending on how it’s done. One downside is more of the owners (more than those listed with intermediaries) are not motivated to the point of action. They’re kicking tires the same as many buyers.
Run, as fast as possible, from any owner who says, “Everything is for sale, for a price.” You will never put together a fair deal with that person. You’ll overpay, and not just by a little.
Search
continually
Be active, be aggressive and be focused. There are a lot of good businesses out there and it’s not easy to uncover the winner that’s a perfect fit for you. It requires hard work and perseverance.
My experience, based on client searches over the past nine years, is a good search system will put a buyer in front of three-dozen businesses (on average) that meet that buyer’s criteria. Half of them will be in the right location, be the right type and be profitable. Due diligence will determine if they’re a keeper.