Growing through Acquisition

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Grow Through Acquisition

If you own a business, my guess is that you want it to grow. There are two ways of doing that: growing organically and grow through acquisition.

Growing your business organically is done by adding more products or services that you can sell to your existing customer, increasing sales of your existing products and services to our existing customers and by finding new customers, entering and servicing new markets, grabbing a greater share of the market you are already in and the like. All of this takes time and effort; determining what new products and services should be added (and the testing involved in making those decisions); establishing and implementing new marketing programs; adding to the payroll (sales and marketing personnel), etc.

Growing your business through acquisition provides a comparatively “instant” growth pop.

All companies try to grow organically and though you will certainly continue to strive for organic growth, if your industry is mature, your company’s growth trend may be little more than incremental.

“For companies that want to grow their topline, and hopefully their bottom line, acquisition can be the easiest path,” says John Troyer, CPA and Partner-in-Charge at Ciuni & Panichi.

But accomplishing a successful acquisition requires significant planning, knowledge, experience and focus – and the right advisors. In today’s sellers’ market, that last point is critical. Here are some issues to consider if you are thinking that acquiring an existing business is right for you.

Is It Good Time to Buy a Business?

I’ve posted several articles on what the market is like right now. In this one I discussed the level of demand that we’ve been seeing. In this one I wrote about various studies of the market done by experts. (And what would we do without experts, eh?)

Suffice to say, there’s a lot of capital in the market at the moment. The economy is strong. Companies have the cash to finance an acquisition, banks are eager to lend and rates are still low. But these aspects of the market drive prices higher as more companies look for ways to grow. And even though more and more businesses will be coming to market with the Baby Boom generation retiring – the so-called Silver Tsunami – it should remain a seller’s market for the foreseeable future.

On top of that, strategic buyers – those companies looking to grow by acquiring another company – are competing with financial buyers such as family offices or private equity firms something I’ve written about here. That competition also drives prices higher. All of this also means it’s a great time to sell, as well.

How Do You find Your Targets?

When you start considering acquiring a business as part of your strategy to grow and expand, unless you have experience in mergers and acquisition – unless you’ve done this before – the first step you should take is hire an experienced professional business broker or M&A specialist. Find someone that knows how the process works. It’ll save you countless hours, a ton of frustration and grief and, in the long run, a lot of money.

The ideal acquisition candidate is a business that complements your existing business; its industry, products or services, customers or geography. If you buy a competitor, there’s a double benefit in that you reduce competition in your existing market channel.

Another target could be a supplier. Vertical integration reduces uncertainty in your supply chain.

Gathering and consulting a team of advisers is key. Business brokers specialize in sales transactions and can identify and vet potential target companies. Such professionals do not limit their search to companies that are for sale but rather find the most compatible targets based on the criteria you develop with your advisors. They also can advise you how to finance and structure a transaction.

The Target is Identified. What’s Next?

If you have an existing relationship with the potential target – for instance, a supplier – the conversation will likely have a pleasant opening. However, the odds are that you will have no relationship with your potential targets (though you may be aware of them – and they of you – simply because most industry players are aware of other industry players), especially if you’ve hired a business broker to scour the market for candidates that meet your criteria.

Once you’ve reviewed the list that your broker presents to you and identify what appear from the original vetting to be the top three candidates, the dance begins.

Acquiring a company is a step-by-step process. Non-disclosure agreements will likely be required by both sides. “By both sides”, you say? YES! You don’t want the principals of the target company to mention your interest in acquiring them to anyone because, if that deal doesn’t pan out, word on the street will spread that you’re looking and potential targets #2 and #3 – and everyone else that might even think they could be a target – are going to start believing they can get a premium over their company’s value simply because they know you’re looking.

As the potential buyer, you will want to negotiate, with the help of your advisors, a letter of intent to make sure that the seller is serious and realistic with the price. As a rule, sellers have an unrealistic – that is, “inflated” – view of their company’s value. An professional business broker can usually explain reality. That said, once the principals of the target company understand reality, they may decline to proceed. (Be prepared for the possibility that your quest may be long and arduous.)

Perform your due diligence to understand the strengths and weaknesses of a potential acquisition. An experienced adviser can identify the documentation and other information that is needed to assess the target’s value and help you assess the risk involved in the acquisition.

What’s The Business Worth?

There are a number of ways to value a company including discounted future cash flows, historical cash flows, similar other private sector transactions or book value. But there are also synergies that may be gained by this acquisition that you, as the buyer and knowledgeable industry insider, can see that your advisors may not; acquiring a competitor – and, thus, reducing the competitive environment in which your business operates – would qualify. Such intangibles may be of significant value to you and for which you would be willing to pay a premium.

DetectiveHave a professional do a valuation. An experienced business broker will generally use several methods of arriving at a range of valuations and may suggest a composite of these methods. But whatever the approach, the sale price should be set using sound financial data and due diligence. That said, there’s risk with all transactions, so make sure you do your home work!

Again, surround yourself with advisers who have experience is the buying, selling and valuing of businesses. Such professionals will help you minimize the emotion that is part and parcel to a major event such as an acquisition. It is highly likely that the seller will have his or her own advisors. Like taking a knife to a gunfight, you don’t want to show up inadequately armed.

What Else?

With the rise in valuations, it can be hard for companies to find what they’re looking for at a good value. Warren Buffett, the American investor famous for buying good but undervalued companies, has been futilely searching for worthy acquisition targets for the past two years because, in his opinion, values have gotten too high.

But he plays in the big leagues. If you’re interested in finding a $5 million or $10 million or $30 million business, Warren isn’t looking in that segment of the market.

The Bottom Line

Private equity firms are generally looking at a shorter ownership window – less than 10 years – and it’s harder for them to find a company that they can flip at a profit in a seller’s market. And, while most transactions involve seller financing or earn-outs, sellers are looking for more cash up front these days. These conditions suggest that finding a suitable target that will compliment your existing business at the right price might be challenging.

But a strategic buyer may be appealing to a seller in that many sellers are concerned about their legacy – will the company survive or will the name disappear? – and how the buyer will treat the employees, customers and vendors, many of whom may have become friends of the seller. Such sellers are more likely to entertain a reasonable offer from a buyer that they perceive as friendly.

But buying a company takes significant capital and ongoing time invested. Do your due diligence. Have a plan. Know your numbers. Make sure that there is a good chance that the acquisition will be a positive contributor to your cash flow.

If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.

I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!

Joe

#business #howto #sellabusiness #becomeabusinessbroker #businessbrokering #businessvaluation

The author holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) and can be reached at joe@WorldwideBusinessBlog.com

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