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MAKING BUSINESS ACQUISITIONS

Who To Buy, When To Buy, How To Buy

By Stephen J. Kerr

When a company or individual has an excess of capital, management skill and ambition - it is time for expansion. And one of the fastest ways to expand your business is by acquiring a competitive or complementary company.

The next question is, who should you buy? Any acquisition or merger must satisfy the goals of the buyer. You may seek to acquire market share by purchasing competitors (horizontal integration) or vendors and trusted suppliers (vertical integration). Deciding which company to make an offer on follows classic target marketing methods:

Define your goals.

Write up a profile on the ideal acquisition.

Make a list of candidates.

Make private inquiries.

Make an offer on the most interesting candidate.

I highlight the need for confidentiality. You may wish to hire an intermediary to make contact with your competitors or suppliers, thereby inserting a veil of secrecy between you and your target sellers. It may be best that they do not know who is inquiring until they have made some commitment to listen.

The time to purchase a company is when they can benefit from being acquired. That is, their company has peaked, run out of ideas or money or both. Look for candidates that have recently had a bad run of luck, lost a major client, key executive, their lease or other short-term, correctable problem. Your offer to buy their company will fall on most favorable ears when they are beset by internal problems.

It is also important to fully understand the corporate culture of your acquisition before making an offer to purchase and take over a company. Many mergers fail because business styles or personalities clash. Get to know your acquisition better than you know your sister before finalizing any deals.

How to buy a company.

It is interesting how many businesses are for sale, if you know how to ask. Many business owners have thought about selling, but lack the initiative to seek a broker and entertain willing buyers. And, there are many ways to purchase a business that fits your ideal acquisition profile even if the owners say that the company is not for sale. The following are three ways to approach your ideal candidate when you are sure that a direct approach will not succeed, or you wish to court a company before initiating a merger:

Propose a joint venture. If your company has a strong marketing organization and more capital than your candidate, you can propose a working partnership or joint venture to accomplish a goal that will benefit both companies equally. By combining resources and working together, it will be easier to propose a merger down the road.

 

Take over distribution, marketing or key functions of your ideal acquisition through contract. For example, an advertising agency with a large account executive team could contract to sell direct marketing services for a local direct mail shop that they may eventually seek to own.

 

Invest today, with an option on tomorrow. Often one can purchase up to 60% of a company while maintaining the current management in place, and take an exclusive option on the remaining blocks of stock at an agreed upon price. By this method you can lock up eventual ownership of the company, but not take control until later.

How much money do I need to purchase a company?

This is a tough question because it varies from deal to deal. If the company you wish to purchase has serious financial troubles then it is easier to purchase it for little up front cash. But, you may have to bail them out with their creditors. However, if your acquisition has had years of strong performance and good net income, you will need to shell out a great deal more cash plus a substantially higher purchase price.

As a rule of thumb I advise my clients to spend no more than 70% of their ready capital to acquire a company, leaving 30% in reserve for unexpected expenses and business expansion.

Making successful acquisitions and mergers is not just a million dollar shell game. You must be sensitive to the needs and motivations of your seller to get anywhere. People do not sell their businesses to people they do not like. Even though you hold the cash, it is a good idea to be polite, be humble and be respectful.