Buy! Sell! Grow!

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One way to start or grow your business is through acquisitions. In some situations, the cost of acquisitions can be less than the cost of generating sales. Furthermore, using an acquisition to start your business can often lessen some of the risk associated with new businesses.

Over the last 20 years, I have been involved in the purchase and sale of over 50 closely held and family-owned businesses. In some cases, the transactions were easy and fun, in others, they were painful (one seller refused to let us tell the employees even after the sale had been closed). Most transactions have some challenges, but, in my experience, the rewards have outweighed them.

The acquisition process is actually fairly simple. A buyer and seller find each other, negotiate an agreement of sale, and then exchange money and other stuff to close the deal. So if it is so simple, then why doesn’t everyone do it? They don’t do it because acquisitions generally involve risk. Risk of paying too much, of accepting too little, of selling or buying at the wrong time, of buying the wrong thing or selling to the wrong party.

It is the acceptance of these risks that generally separates owners and entrepreneurs from employees.

Why Buy or Sell?
Motivation to buy and sell plays a big role in all acquisitions. Each party to an acquisition has a reason for doing the transaction; understanding these reasons can help you negotiate an acceptable deal. Examples of reasons to sell include retirement, reduction of risk related to owning the business, having no one to pass the family business to, negative cash flow and/or burnout. Reasons to buy are also varied and can include the elimination of a competitor, wanting to work for yourself, expansion into a new business area or just the expansion of your existing business.

It always makes me laugh when someone says he won’t buy someone else’s business because there must be a negative reason for the sale. As one friend once said, “If the business were really good, she wouldn’t be selling anyway.”

Taking the Plunge
Like all relationships in your life, finding someone to do a transaction with can be a matter of chance. In my last article, Rolling With The Punches, I talked about how serendipity played a roll in my completing the first transaction that helped me start my current business. Sellers and buyers find one another in many ways including through brokers or other intermediaries, by contacting competitors and others in an industry, and by advertising in the newspaper or even on the Web. My introduction to my current business came from searching my favorite business-for-sale websites until I found a business and industry that fit me.

Once a buyer and a seller find each other, they can negotiate price and terms. There are a number of issues that come up in almost every acquisition negotiation: price and method of payment, what assets are to be transferred, risk allocation issues and security. When buyer and seller are both motivated to complete the transaction, most of these issues can be resolved quickly and easily.

Price, payment method and assets to be transferred are very much intertwined. Each industry has basic methods for determining an appropriate price. Revenue, EBITDA (earnings before interest, taxes, depreciation and amortization), asset values, profitability and other economic factors will help determine a fair price. Also, transaction structure issues such as whether the buyer purchases stock or assets and whether the buyer is prepared to pay all cash or wants the seller to finance some of the purchase will affect the final terms. Based on the tax issues involved, sellers generally want to transfer stock for cash, and buyers want the seller to finance asset sales.

Protection
Protections in purchase and sale transactions come in the form of a security agreement for the seller and from due diligence performed by the buyer. In my case, I often require the seller to make representations on the economic and business factors that helped me form my decision to buy in the first place.

Historically, sellers providing financing have used traditional security agreements to protect themselves. Traditional security agreements provide for liens against the assets and stock sold until all the terms of the purchase agreements have been satisfied (including the payment of any deferred purchase price). However, in service companies like mine, traditional notions of security don’t fit because the value of the underlying businesses far exceed the value of the assets needed to create the value. In those cases, sellers will ask for external security and personal guarantees to secure their purchase agreements and sellers (like me) will rely on the wherewithal of their firms and their reputations to satisfy seller concerns about security.

Security for a buyer generally comes in the form of due diligence performed prior to the closing. Due diligence can range from confirming that the assets to be sold exist (site visits) to confirming that the money the seller says he is collecting is actually coming from clients and making it to the bank. In one instance, my due diligence uncovered that the seller was selling services from one of his companies to another and that he was actually counting the revenue twice. When I added a revenue representation to the purchase agreement (I was buying both companies), the seller’s accountant called me to tell me what was really happening and that the seller could not represent the revenue I was expecting. This discovery resulted in our not buying that business.

Final Thought
I have done many successful acquisitions over the years, and I have done a few that I wish I had never seen. For a buyer, acquisitions can be a great way to get into a business or to build and grow your business. As a seller, finishing the sale of your business can often be the crowning and final action of the successful process of building and running a business.

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