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Article added or updated:
03/30/2008 |
INDIVIDUAL BUYERS/INVESTORS –
MAKING YOUR FIRST COMPANY ACQUISITION
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06/08/05
By David M. Kauppi, CBI
Related Artcles:
Buying a Business
Company Website Value
Strategic
Acquisition
Selling Tech Company
Maximize Business Value
Selling Your Business
Sell Your Business
As a professional M&A intermediary I am amazed when I hear others in my
profession at industry meetings proclaim, “I don’t 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.
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| 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 don’t 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 that’s 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 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
seller’s 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
buyer’s 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.
David Kauppi is a Merger and Acquisition Advisor
with Mid Market Capital, Inc. MMC is a private investment banking and
business broker firm specializing in providing corporate finance and
business intermediary services to entrepreneurs and middle market
corporate clients in a variety of industries. The firm counsels clients
in the areas of M&A and divestiture, succession planning, valuations,
corporate growth and turnarounds. Dave is a Certified Business
Intermediary (CBI), a licensed business broker, and a member of IBBA
(International Business Brokers Association) and the MBBI (Midwest
Business Brokers and Intermediaries). For more information or a free
consultation please contact Dave Kauppi at (630) 325-0123, email
davekauppi@midmarkcap.com or visit our Web page
www.midmarkcap.com.
Related Artcles:
Buying a Business
Company Website Value
Strategic
Acquisition
Selling Tech Company
Maximize Business Value
Selling Your Business
Sell Your Business
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