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BUYING A BUSINESS - ADVICE FOR THE FIRST TIME BUYER/ INVESTOR
As a professional M&A intermediary I am amazed when I hear
others in my profession at industry meetings proclaim, I dont
work with individual buyers. They put it out there almost like
a badge of honor or an indication of reaching a higher level of
professionalism. My first reaction is, shame on you. My second
reaction is, how short sighted. My third reaction is to
understand why and to advise buyers on the preparation necessary
to gain credibility, traction, and support from a qualified
business broker or M&A Professional. The purpose of this article
is to give the first time buyer some action items to complete
before they approach a M&A professional to improve the
likelihood of garnering professional support.
First of all, please recognize that there is tremendous
competition at the Main Street Level (transaction value under $1
Million) for business acquisition. This phenomenon is the result
of down sizing and early retirement of mid level and senior
executives in their forties and fifties. These people have
exited with a war chest of a half million dollars and have vowed
to never again be a victim of a corporate restructuring. They
want to control their destiny, run their own show, buy and run a
business. Most of these people are looking to buy a job.
You and 10 million other buyers:
I am looking to buy a niche manufacturer or distributor with $3
to $10 million in revenue and $500 K to $1.5 Million EBITDA and
I dont want to pay more than a 3.5X multiple. I have about $350
K of my own to put into the deal and I have investors lined up
for another $1.5 to $2 Million. Pleeeeeeese! Do me a favor. When
you have a first meeting with an intermediary and you deliver
this message, make sure you are on the first floor. I hate to
see my colleagues leaping from tall buildings.
Do your Homework:
There are several things you can do to improve your chances of
getting and keeping the attention of a broker.
1.Be Specific. In the example above, the category was so broad
that you come across as being not focused, not prepared, and
wishy-washy. Translation this guy is a long way away from
pulling the trigger. Your best bet in getting support from
investors, friends and family, and bankers is to purchase the
business you were employed by or a very close competitor.
Specific industry experience improves the potential of the
acquired company surviving and servicing debt. Pick out a sample
company of the size range and industry you are targeting and
present that as an example of what you would like to acquire.
Take it a step further and be prepared to articulate your area
of expertise and how you would apply that to make this sample
business perform at an improved level. This should be a one to
two page summary document. Now thats focus.
2.Funding Preparation. Know exactly what you can put down on the
business. If you are not prepared to supply your broker personal
financial statements, you probably will not get any help. Go and
have the specific discussions with the friends and family (take
your sample business and your performance improvement plan).
Present your expected returns/equity percentages and ask them
what they are willing to commit. A signed letter from these
folks describing their backing is a very powerful attention
grabber. Do not assume anything. Know your support level before
you and everyone else does all the work to find a qualified
acquisition candidate only to find out your investors did not
materialize.
3.You are selling yourself. In a sense you are interviewing for
a job. Bring the materials that support why you are qualified
for the job. A resume is essential and written references are
good to have. Remember, most of these transactions will require
the former business owner to carry a seller note. They want to
understand exactly to whom they are lending and the risks
associated with servicing this debt.
4.Realistic expectations. A good business for sale will not be
purchased at financial buyer pricing multiples. An attractive
business i.e. one that has a high growth rate or, proprietary
technology, barriers to entry, contractually committed recurring
revenue streams, blue chip customers, brand recognition, high
gross margins or a combination of these will command pricing
that is above a strict discounted cash flow multiple. The market
will recognize some strategic pricing component and the company
will get visibility from strategic buyers. Even Private Equity
Groups that are assumed to be strict financial buyers, do factor
in pricing considerations that might reflect ownership of a
portfolio company in the same market space. The better the
business, the greater the universe of buyers. The good news is
that a company that has attractive characteristics, but is small
(below $5 Million in sales) probably will not interest the
Private Equity Groups.
5.Network Network Network. A great way to improve your chances
of successfully purchasing a business at a good price is to have
an entree into a business that is not formally for sale. What I
mean when I say that the business is not formally for sale is
that the owner has decided that he wants to exit and has shared
that information with a few close advisors, but has not engaged
the services of an M&A firm or advertised on one of the popular
Buying Your FreedomIf you're reading this article, it's probably because you're one of millions of people who dream of breaking free of ..... Business for Sale Web Sites. Put the word out to your network of
professionals, industry sources, trade associations, vendors and
suppliers, etc. Utilize the same preparation as described above
and hand out your materials. Your banker, your lawyer, your
financial planner and all of their associates are great sources
of businesses for sale. Remember, if you do not establish your
credibility with them in your preparation, they will not risk
their credibility with another client through an ill-advised
introduction. The good news from this approach is that you may
be able to purchase a good business at a bidder of one price
without price pressure from other buyers. If that sellers
trusted advisor brings you in, the chances of this happening
improve significantly.
6.How serious are you? Lots of individual buyers will pay a
broker or intermediary a success fee based on a percentage of
the purchase price. The most serious buyers, however, pay buy
side engagement fees as well. This is a fee usually ranging from
$2,000 to $7,500 per month paid to the M&A professional to
formally search for you outside of the networking only approach
they would take for no engagement fees. Corporations in
acquisition mode almost always operate this way. The benefit to
this approach is that the intermediary will expand the universe
of candidates to those companies that fit your buying criteria
that are not for sale. It is a lot of work to compile databases
and try to break through the difficult barriers to reach an
owner that was not contemplating a sale and convincing him to
entertain this process. Our objective is to buy his company as
the only competitor. If we can do that, the transaction price
will generally be 20% below a business that is formally for
sale, represented by a professional, and getting many interested
buyers. Saving you $1 Million on the purchase of a $5 Million
business certainly will justify any monthly fees and success
fees an M&A professional would charge. The corollary to this is
if you are a business seller, and you do not engage a
professional, you most likely will leave that 20% premium on the
table.
Most individual buyers are engaged in the buying process with
either no current income or very limited consulting income. In
other words, buying a business is their full time job. While one
operates in buying mode, they are working for no income. The
longer that buying process takes, the greater the erosion of
their financial resources. It is in the buyers interest to not
only purchase the right business at the right price, but to
compress the amount of time it takes to complete the process.
Implementing one or several of these recommendations should help
you buy smarter and faster.
About the author:
Dave Kauppi is a Merger and Acquisition Advisor with Mid Market
Capital, Inc. MMC is a business broker firm specializing in
middle market corporate clients. We provide M&A and divestiture,
succession planning, valuations, corporate growth and turnaround
services. Dave is a Certified Business Intermediary (CBI), a
licensed business broker, and a member of IBBA and the MBBI.
Contact (630) 325-0123, davekauppi@midmarkcap.com or
www.midmarkcap.com.
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