Saying you want to buy another firm in this business is one thing – actually doing it is another.
If your A/E firm has any size or resources whatsoever, you could very well have acquisitions in your strategic plan. But saying you want to buy another business is one thing. Actually doing it is another.
Some people say they want to do acquisitions but never really try in any meaningful way to do so. That keeps the fantasy of buying another firm alive as it always remains a possibility. I’m personally more inclined to try to do something and possibly fail than I am to never try so I never fail. If you are like me, let me pass on a few tidbits that might help you!
- If there is a firm you are interested in acquiring, make an inquiry! You don’t have to know they want to sell. You can do it yourself, or if that feels too awkward or you are worried they won’t be honest with you, hire a consultant, investment banker, business broker, or attorney to do it for you. What do you have to lose? The worst that can happen is they say “no” and maybe you will make a new friend you can cooperate with or someone to compare notes on the business with. But maybe they will say “yes,” and you will suddenly have a new growth option to explore.
- Always talk to the top person in the firm. That is either the founder, chairperson, CEO, and/or majority owner. Do not waste your time with someone who is lower down in the pecking order to make your case for selling to.
- Timing is everything! You just never know when someone will have a particularly bad day, learn about a new health problem, or suffer some kind of personal setback that makes them decide they would like to sell their business and get out. Start the conversation to learn. And if not now, maybe they will come back to you later.
- Talk potential deal structure early in the process! If you have a range of value based on a lot of variables you don’t yet know the answer to, tell them that. If you know you don’t have a lot of cash but could pay for the seller’s book value up front because of your ability to borrow on their assets such as accounts receivable, tell them so. If you know you would have to get an SBA loan to do the deal, tell them. If you know the seller’s principals would have to stick around for at least a year or two, tell them that is what you are thinking. The sooner you can get to the meat of the discussion, the better.
- “Cultural compatibility” (something everyone who does acquisitions talks about) is important, but it isn’t everything. You can have all the compatibility you want and your principals can love their principals but if the deal is so expensive it never pays for itself, you failed. I think a lot of people trying to do these deals forget that.
- Value is completely subjective. Anything, including a business, is worth whatever someone else is willing to pay for it. So many of the so-called experts want to talk multiples of EBIT for value determination. I find that means little to nothing unless you have a completely steady-state firm AND a purely financial buyer (meaning one who only cares about the financial returns of a stand-alone company). Growing companies will have wildly different prospects and EBIT forecasts that can require you to throw that rule-of-thumb out the window. Companies that have strategic significance to your firm (meaning that you think your whole firm can perform better if they were part of your company) may see a higher valuation because of it. Employment agreements are also a huge deal and part of the value. There are many factors to consider when setting value beyond some arbitrary “X times EBIT” formula offered up by a jargon-speaking spreadsheet jockey.
- The price being paid is only one of many variables to consider. The deal structure and how much of it the seller has to finance may be a bigger part of it. There is a lot less risk for you as a buyer if you can get the seller to finance more of your purchase. Their willingness to do that is going to be based on how many other options the sellers have, how badly their owner(s) need cash, and their assessment of the likelihood you will be able to run their business in such a way that you will be able to afford to make your payments to them. So while you will have to do your due diligence on them, they will conversely want to do it on you.
- It’s all about trust. You have to keep any conversations with a potential seller absolutely confidential. You can do huge damage to their business by letting word get out that they may be selling. “Loose lips sink ships,” applies here! So don’t violate the sellers’ trust by blabbing all over that you are trying to buy them.
I could go on here but am out of space. I hope this is helpful to some of you. Let me know your thoughts!
Mark Zweig is Zweig Group’s chairman and founder. Contact him at email@example.com.Click here to read this week's issue of The Zweig Letter.