How To Buy a Business

By September 10, 2018February 4th, 2021No Comments

Are You a Business Owner Looking to Grow by Acquisition or An Individual Looking to Buy Your First Business?  There is a Better Way that Should Guarantee Success!

One of the less common areas in the business brokerage industry is the idea of growing a business by corporate acquisition, in essence buying a competitor. This same approach also works well for an individual looking to buy a small or mid size business.  Many business owners have thought of this – but few will complete an acquisition.  Why? Often it is the difference between proactive and reactive buyers.  Let’s look at the differences between reactive and proactive approaches to buying a business.

A reactive buyer is one who waits and hopes a good acquisition opportunity will come along at the right time.  The buyer may actively search listings of businesses for sale, yet even this is reactive as they are only looking at businesses who have already decided to sell.  Alternatively, they could approach a business intermediary and say: “If you come across something I might be interested in let me know and I will take a look at it.”   There are good business intermediaries who do keep an ear to the ground for his potential buyer.  Bear in mind that this business intermediary will likely need to have the buyer’s industry as a specialty niche, one who knows the majority of businesses in the appropriate geographic area and understands the industry business parameters.  This is virtually the definition of reactive!  The buyer is waiting for the phone to ring.  Is that the way their sales team brings in new customers?

The odds of acquiring a firm or competitor this way are slim.  When a good buying opportunity surfaces, how likely is it will be a good time for the buyer?  “Something’s come up and I can’t do this now…”  Is it even a good opportunity?  In a typical geographic area there are rarely more than 2 or 3 similar businesses for sale out of what may be hundreds of firms.  That is not much a cross section to measure a business’ strength with regards to the industry.  Does the buyer have the time and wherewithal to concentrate on this effort when the opportunity knocks?  Is there a financing plan in place?  How does this affect the business and pro forma plans? There are likely very few successful businesspeople that would pursue any other goal in this manner.

What does a proactive buyer look like?  A proactive buyer commits him or herself to making an acquisition.  The commitment to acquire should be part of a strategic plan, including parameters that define the acquisition: industry vertical, revenue size, geographic area to mention a few.  Is the buyer expanding geographically or moving into new product/services areas or reaching out to a new customer demographic?  A clearly defined picture of the acquisition raises the chances that an acquisition can be absorbed smoothly into the existing organization.  The buyer also should mentally set aside time and energy to devote to the acquisition effort, say 5% of his time.  There needs to be some thought given as to how the down payment and financing will take place.  In most cases, the financing may be covered in the cash flow of the acquired business.  Strategic acquisitions are more attractive to third party lenders, because the acquirer has industry experience and their own cash flow to add additional strength to the deal.

A program with a plan has a higher chance of success.  But if the buyer has not done this before, it usually makes sense to retain a business intermediary who has this unique experience and track record.  The intermediary  will have a well-defined program to coach the buyer through the entire process, including such items as defining the search parameters, scripting the outreach dialogue, assembling the list of pre-qualified candidates, collecting information to qualify the candidate, and determining if both buyer and seller should move forward.  The business intermediary can initiate a conversation with a potential seller to determine on a macro level if a seller is a good match.  Questions may involve percentages of revenue along product/service lines, staffing, service area, client/customer demographics, etc.  An effective campaign can act as a survey on the local industry revealing local industry ratios, trends and practices, enabling the proactive buyer to effectively evaluate his own firm and others. With the additional information an attractive deal may be quickly identified.  Perhaps more importantly is the issue of maintaining confidentiality.  In fact many times a third party is required to initiate any such sensitive discussions.  After all, can you call up your competitors and say, “Do you mind if I take a quick look at your financials?”

Because you are reaching a much broader audience as opposed to the number of available businesses publically listed, finding a successful match is much more likely.  Contact an ROI intermediary or go to our website, www.roibusinessbrokers.com, to learn more about our unique Proactive Acquisition Search Service (PASS) Our service not only helps firms grow by acquisition but also works for first time buyers targeting their  ideal business.  Let us show you how this strategy can be faster, less risky and less expensive than trying to grow by standard organic sales force methods or starting from scratch.  Such a solution may produce a positive reaction in many a business owner!

By: Paul Corrigan