Bought a small company a couple of years ago taking the business growth by acquisition approach. Everything that was bad with that deal is now coming to fruition. Any suggestions on what to do to make things better – either on this, or future acquisitions?
Thoughts of the Day: Business growth by acquisition is a great way to grow. According to the statistics, not all deals are good deals. Both sides, buyer and seller, need to do their homework. For the seller, more potential buyers are usually a good thing. For the buyer, finding the right fit at the right price is crucial.
Business growth by acquisition can be a smart play
Whether you’re looking to become a small business owner for the first time or expand your existing company’s footprint, small business acquisition can be a smart way to grow. For sellers, it’s a way to take chips off the table. But the final deal has to be good for both parties. There’s no guarantee that a potential deal will pan out. Most folks we talk to report that less than 1 in 5 potential deals actually cross the finish line. And many of those don’t produce expected results.
Buyers and sellers need to focus on different goals.
Buyers must not focus on potential and overlook pitfalls. They should be prepared for lengthy negotiations. Smart buyers involve advisors with loads of experience evaluating and executing deals. Sellers should not confuse their sweat equity with a realistic valuation. They should be upfront about challenges and avoid putting up roadblocks. They want to be clear-eyed about what the business is worth, instead of trying to negotiate for what they need in order to retire.
Regardless of how good the deal seems, make sure you do your due diligence.
It’s important to do thorough due diligence. Buyers must analyze what’s offered, figure out how the acquisition will work inside their business, and be willing to walk away if the deal looks too risky. Looking at lots of deals helps buyers sharpen their skills and gives them options if one deal doesn’t work. Sellers must know what’s reasonable to ask, what a good buyer looks like, and when the negotiation is good enough.
If things go wrong, it’s often that revenue doesn’t pan out because customers don’t stick around. Buyers often do better-negotiating payout contingent on revenue and paying a bonus for hitting milestones. Sellers should not promise more than they can deliver. Sellers usually get less in an upfront deal, more if they take some risk over time.
After the deal is complete, both buys and sellers need to adjust.
Once the deal is done, the buyer’s and seller’s recourse is limited to what’s in the contract of sale. The buyer should look at expanding and adjusting the new book of business. The seller should demand progress reports and audit progress payments.We advise sellers to focus the last 3-5 years of ownership on perfecting the business for sale. That means maximizing productivity and profitability, reducing debts and outstanding accounts receivable, cleaning up the books, and getting a series of valuations done that show progressive results.
Sellers also want to be clear about the profile of “best buyers” likely to pay maximum value. Perfect assets that fit the needs of buyers likely to pay a premium. Contact business owners interested in the industry to find out what challenges they’re dealing with. Figuring out how to minimize or eliminate those challenges adds value to the sale.
Consider risk vs. reward in business growth by acquisition.
Buyers need to be clear about the amount of risk they can afford. Entrepreneurs don’t do enough to think pessimistically, and generally, that’s okay. But when buying a business, it’s best to think about everything that could go wrong. Look for owners who have reasonable expectations. Compare paying one price versus negotiating terms based on risks. The risk scenario usually costs more if the deal goes right but can be a lifesaver if the deal doesn’t pan out as expected.
Looking for a good book? BizBuySell Guide to Buying A Small Business: A Roadmap to the Successful Purchase of a Business, by Ed Pendarvis.
