Strategic Acquisition
Strategic Acquisition

Strategic Acquisition

Finding an ideal acquisition target may be the most difficult part of the process.  Your task is not only finding candidates that meet your goals, but also approaching and dealing with prospective sellers who may be more than a little apprehensive about selling their companies and even about disclosing sensitive, but essential, information to you. (Location 1049)

You really need to evaluate both the business itself and the person(s) who may be selling the business. (Location 1055)

However, in the very early stages we advise that you assume (within reason) everything presented to you is true. (Location 1063)

As a rule of thumb, we figure that if the top of the buyer’s range is within 30% of the seller’s asking price, we are in negotiating range.  If your (Location 1074)

Your first order of business is to keep your new company’s employees and customers happy.  Make especially sure you keep the former owner(s), who is probably now your employee, happy. (Location 1117)

A natural marketing goal of acquisition is the merging and sharing of distribution channels. (Location 1160)

For this reason, gaining the seller’s trust and confidence is important.  Your acquisition summary should include information about your own company’s background and plans regarding acquisition. (Location 1307)

We deal extensively with private equity groups (PEGs). These PEGs are in the business of acquiring and growing companies on behalf of investors who have provided them with capital to deploy. (Location 1312)

Finding these gray area sellers is not easy.  In chapter VI we will outline the emotional attachment many entrepreneurs have with their business.  Selling one’s business is an emotionally wrenching undertaking, such that even an owner considering selling will not always readily respond to a query about selling. (Location 1450)

However, the necessity of reaching the owner directly and the need for confidentiality makes email a less-than-ideal search method.  Also, the old fashioned first class letter on quality paper seems to have more impact than does an email, no matter how well it’s worded. (Location 1485)

If you do get a “no,” try to keep the door open.  Whatever you do, don’t alienate your potential seller with a statement like “Well, I’ll put you out of business anyway,” or “You’re making a big mistake." You see, it may not be a hard “ (Location 1637)

Try something non-threatening like, “I understand. I wish you the best of luck. Let’s keep in (Location 1643)

Despite the entrepreneurial myths, many small business owners simply get bored with their businesses. Buyers tend to be especially suspicious of this as a reason for selling. After all, small business is played up to be the greatest most exciting pursuit there can ever be. (Location 1904)

There are businesses out there with burnt-out owners who don't have the drive or the energy to exploit their company's potential. This kind of company can be a great opportunity for a buyer with the energy and drive to make it happen. (Location 1912)

At that point the consultant finally got it. Frank’s business had no management infrastructure. Frank was stretched too thin. To grow beyond where it was, this company needed a system of management that had better procedures in place and that delegated responsibilities. (Location 1958)

Such companies tend to hit a sort of ceiling they can’t break through without a systematic management infrastructure that relieves the owner of running every aspect of the company. (Location 1963)

Companies that fit this profile can be great growth-by-acquisition opportunities, especially if the purchasing company can take over some of the mundane functions that are problematic for the selling company. (Location 1966)

You, on the other hand, may look at the business and figure that with the resources your company will bring to bear you can manage and grow it faster than the current owner can. (Location 2018)

The prospective buyer, he explained, would only become the actual buyer if they believe that they could run the company. She indicated she understood. (Location 2024)

These were sophisticated executives who were adept at acquisition. As such, they saw right through the seller’s ego based belief that only she could run the company, and of course didn’t challenge that belief with the seller. (Location 2029)

As with employees, some business owners insist that their customers or clients receive the same level of service that they are accustomed to going forward and will try to gauge a buyer’s ability and intent to treat customers well. (Location 2040)

Although Jim would get a good deal of cash from the deal and a nice employment contract, he felt he would lose his status and identity in the community. (Location 2046)

If an owner is most interested in selling because his spouse or business partner or someone else is pressuring him to do so, be careful. (Location 2081)

This phenomenon is tougher to spot, but worth looking for.  An owner whose whole identity is his business may have difficulty pulling the trigger.  Try to get a handle on the owner’s life outside his company.  Does he talk about his family, travel, hobbies, volunteer activities, even other business interests, or anything else that gives him an identity outside his business?  If the answer is no, he may have difficulty letting go of his company because he is his company. (Location 2091)

The value of a stock, a bond, or a CD follows this principle, as should the value of a business, and to most buyers, it does. (Location 2109)

Unfortunately, there are many intermediaries who are more than willing to take advantage of this rules of ROI don’t apply to my situation phenomenon.  They will tell prospective sellers what they want to hear: “Your business is worth much more than those silly ROI formulas indicate. (Location 2117)

If you are talking with a seller who has seemingly inflated ideas about the value of his company, ask him for the basis of his valuation.  If the answer is from a seminar on selling a business, or if he talks about hidden assets or overly generous oil kingdom buyers, and he seems (Location 2142)

Unless the company that you are acquiring is very small, it likely has a management team in place.  You need to evaluate that team to see how well their skills match the needs of your organization, how likely the team is to remain in the intermediate and long term, how easy it will be to learn their skill sets if they do leave, and how easy it will be to work with the acquired company’s personnel. (Location 2471)

Some businesses have invested heavily in management systems.  These systems can include formal documentation of processes, workflow management tools, ERP software, supply chain management systems and more.  These systems can include formal registration (such as ISO:9000 or QS9000). (Location 2479)

Buying a business with a formalized management system can help with the transition and enable you to detect problems earlier than you would notice them in the absence of such a system. Quality management systems can also confer a competitive advantage in marketing and sales. (Location 2484)

The new owners, however, made several changes. The seller had maintained an open book policy: every employee received a complete set of financial statements every month, a policy that made the new owners uncomfortable, perhaps in part because they assumed a heavy debt load to finance the transition. (Location 2493)

Some buyers who are sophisticated in buying cash businesses use a number of analytical techniques to estimate just how much is coming off the top. (Location 2509)

That is why you need to adjust to the fair market value of the assets.  The value of inventory or work in process may also be understated in a small business. (Location 2605)

at close, and how much of the risk you want the seller to retain.  For a typical seller on an offer that is mostly paid for with cash at closing, as a rule of thumb, start with the value for a financial buyer and add 5 to 20% of the (Location 2651)

One big advantage from the seller’s perspective of structuring the deal as a stock sale is that in a stock sale, the seller clearly leaves behind almost all contingent liabilities, including the threat of future lawsuits. (Location 2759)

is far more productive to compliment the seller where you can, and keep your negative observations to (Location 3022)

As a rule of thumb, offer no more than fifteen percent lower than you are prepared to pay. (Location 3031)

You can always be the good guy while one of your advisors or associates is making all the tough demands. (Location 3086)

Another scenario we’ve witnessed all too often is a buyer trying to dazzle a seller by demonstrating his mastery of sophisticated financial concepts. (Location 3108)

Yes, after the sale, the old owner may have a boss, but it won’t be in the sense that someone will be looking over his shoulder and telling him what to do all day.  It will be more like setting goals and meeting periodically to discuss progress toward those goals and business strategy in general. (Location 3134)

Conversely, many buyers assume that an owner will be unwilling or unable to accept direction because they are used to being the boss. (Location 3139)

much.” Of course a seller wants to believe he is getting a good deal.  But the idea that someone out there might offer him a better deal is very seductive, albeit probably neither logical nor true. (Location 3182)

However, it is generally not necessary to bring your lawyer into the acquisition process until you are ready to make an offer. Your lawyer will have a major role in the process once an offer is made. Some of the legal issues involved in buying a company are outlined below: (Location 3202)

If you are not sure about whether there are encumbrances placed on the company or associated property that you are considering, check with the secretary of state's office in your state, the city or town in which the owner lives, and the city or town where the target business is located. (Location 3221)

This examination process is called the due diligence process. As a buyer, you have the responsibility to exercise due diligence or appropriate care and caution, in investigating the seller's property, records, financial data, market data, etc. (Location 3235)

While it is the seller's responsibility to provide the information, it is the buyer’s responsibility to examine and evaluate the information presented. If the seller provides the information without withholding damaging facts, and you do not properly evaluate the information, it will be very difficult for you to later initiate a claim of misrepresentation after the business changes hands. (Location 3238)

The buyer, however, never asked about the pipeline of future engineering contracts, which meant that the deal closed with the buyer having a far poorer forecast of future earnings than could have been the case. (Location 3245)

quo of the business up until the closing as required by the LoI. That is, the owner kept prices approximately the same, kept the inventory at normal levels, maintained employment status, kept the same hours, and so on. (Location 3294)

However, be careful in preparing the non-compete agreement. For a non-compete agreement to stand up in court, it usually must be significantly limited in scope. (Location 3299)

and likely stand up if it found its way to court. Don't fall for the trick some sellers use of offering a very broad non-compete agreement that they know cannot be enforced. The rationale guiding non-compete agreements is that a person cannot be overly restricted in his right to earn a living in a free market system. (Location 3310)

Purchase and sale agreements often stipulate various conditions where seller owes a credit to the buyer (or vice-versa).  Generally, the sales agreement will be based on a net balance sheet at closing that will include A/P, A/R, inventory, work in process, etc. (Location 3360)

A buyer wants to know that they are not going to face significant unexpected expenses. However, nobody is interested in making very small adjustments to the purchase price after the close. Hence, many Purchase and Sale agreements contain basket and ceiling provisions. (Location 3367)

a customer returns a defective item bought pre-closing the amount of the refund might be added in as well. If the basket stays below a threshold defined in the agreement nothing happens. (Location 3372)

Even for the purchase of a very small business, the legal expenses entailed in transacting it are substantial. It can easily cost several thousand dollars to have the agreement(s) drawn, for advice along the way, and for the actual closing. The purchase and sale agreement is a major part of the expense. (Location 3389)

A transcript of the return, which is not an exact copy but can be used to verify the figures on the return, can also be acquired with form 4506-T. (Location 3419)

Often, a seller is reluctant to allow the buyer to have direct contact with the employees and customers before the deal is consummated, since it is embarrassing and potentially damaging to explain why a deal fell through if the sale does not close. (Location 3440)

Sometimes, talking to employees and customers is deferred until late in the process, after the buyer has agreed that the financial and other due diligence items are acceptable. (Location 3442)

As part of the quality management system employee and customer satisfaction was routinely assessed twice a year. (Location 3447)

We have also seen buyers ask customers for a reference using a vague explanation such as "We are considering providing the company with investment capital." (Location 3449)

Unless you have purchased a distressed business, it is important to make sure that you make changes slowly and only after you thoroughly understand the business. (Location 3459)

Even if you are not retaining the former owner as an employee after the closing, it is wise to try to retain him as an advisor for some period of time. Perhaps he can be retained on an as needed basis.  Few sellers are unwilling to consult on an occasional basis. (Location 3465)

Managing a business remotely decreases the chances that you will learn of problems with employee morale or customer dissatisfaction and will make it harder to form a bond with and inspire employees. (Location 3469)

Once you have reassured the employees, you need to reassure key customers that the fine products and services they received will continue to be supplied without interruption. (Location 3475)

In a service business, stress that the people providing the services will not change. (Location 3477)

In some cases, the acquisition can be relatively seamless; so seamless that customers will hardly be aware of it.  For example, few customers of fuel delivery services or of boxed software providers know the owner of the company from which they are buying their oil or software. (Location 3478)

Where you need to merge operations to achieve economies of scale, do so slowly, using discrete steps that do not cause a loss of key employees or customer confidence. (Location 3482)

A soft barrier is a task that is relatively easy, but requires that the seller expend some time and effort.  Often, there is information that can be relatively easily complied by the seller, and which will be very useful in determining the valuation of the company; asking for that information is a reasonable soft barrier to (Location 3540)

If there is a crucial asset, license, or supplier, make sure that you don’t pay for a business that will be hobbled by lack of access to that asset. If the asset is controlled by the seller, insist on perpetual rights. (Location 3549)

There is an accounting department to deal with accounting and finance, a human resources department that handles personnel issues, a marketing department, etc. Each is run by someone who specializes in that department’s functional responsibilities. (Location 3559)

There are very good reasons to avoid making an offer or any type of binding proposal prematurely.  That’s why we advocate a preliminary step: the non-binding proposal. (Location 3606)

We’ve seen a number of instances where a seller looks at a long and complicated Letter of Intent, and after a few minutes says something like, “This is too complicated. I’ll have to run it by my lawyer and I’m not even sure it’s worth it.”  Of course this kind of situation only happens when the buyer has ignored our advice to keep the initial LoI or proposal simple. (Location 3628)

However, our advice is to go slow.  Most professional business buyers spend a few months observing operations of their new acquisition to learn what works and what doesn (Location 3636)

However, before essentially demoting current management, it is important to learn why they do things the way they do.  There may be very good reasons for certain policies and practices that aren’t obvious from initial observation. (Location 3642)