How to Grow Profitability via Acquisition with Little or No Cash Outlay
1.
2. How to Profit through
Acquisition
(With Little or No Cash Outlay)
3. Is Acquisition right for your
business?
• Is bigger better?
• Competition
• Geographic
• New lines of business
• Can you handle the new company?
• Management
• Capital
• Is this part of a well thought out
long term plan?
4. Can you profit from the
acquisition?
• Combined cost savings
• Decreased competition
• Synergies
• Bargain purchase
5. Three conditions of Business to
be acquired
• Succession issues
• Performance issues
• No issues (strategic)
6. Succession Issues
• Baby becomes generation in reaching
retirement age.
• Most businesses do not have a succession
plan other than “we’ll see how it goes”.
• This is an advantage to the buyer
• You are bringing a solution to the selling
owner
7. Performance issues
• Businesses may be looking to sell, because their
alternative is closure
• It may be a management problem
• They are your competition, but are failing
• Can you do it better?
• Do you have time?
• It may be a core business problem:
• Too much competition- Watch Out!
• Too little demand- Watch Out!
• Be prepared to pay little for such a business, but also be
prepared to feed the business more capital
8. No Issues
• Difficult to motivate the seller
• You may end up with a Partner
• Pricing may be high
• Diamond in the rough; Successful business
that doesn’t present well
9. The Price is Right
• Real Estate is Location, Location, Location
• Business acquisition is Patience, Patience,
Patience
• Time is on your side. If you are maximizing your
efforts, the sellers will be the more motivated
party
• Professional business valuations are available
but expensive
• If you understand the business, you should be
able to determine a price
10. Build Model
• Businesses trade or cash flows
• Capital intensive businesses will also include equipment
and inventory in their value
• Be prepared to start at 4-5x cash flows, plus the fair value
of capital
• This is not set in stone
• Pay attention to the yield on assets
• What if there are no cash flows?
• The business is worth the assets, or some discount
• Seller may be motivated to get out of debt
• Don’t get sucked into paying up for future growth
11. Cash Flows
• Beware of the accounting system
• If the business has not been audited (common) then the
financial are wrong
• This is not set in stone
• Pay attention to the yield on assets
• Watch out for “person items”
– In your purchasing model, build in estimates for the unexpected.
• Some capital equipment may need to be replaced
• You may need additional labor
• Make sure that the owner has deducted fair
compensation for themselves.
• Some owners confuse profit and compensation
12. Deal Structure
• Standard deal structure is either:
– Purchase of Stock
• You assume unlimited liability
• Seller gets capital gain treatment
• I don’t recommend it, but it should certainly affect the price if you go this
route.
– Sale of Assets
• You get a fresh start with the business
• Seller’s tax status is a little gray
• It is their responsibility to anticipate the outcome of the sale of their business.
• Additional price is worth the avoidance of liabilities
• It would be good to understand the seller’s needs and
motivations as early as possible in the process
13. Payment Structure
• This is where the little or no cash concept comes in
• The days of being able to borrow money from banks to
make business purchases are behind us
• A cash offer should not be expected, but the seller may
have a specific need
• Don’t ever pay all of the purchase price in cash.
• Limit to 10-20% of the price.
• Get a price concession appropriate to any level of cash that you fund up front
• Seller financing can solve two issues:
• Financing the deal (obviously)
• Taking the place of a performance or non-competition agreement.
• The seller should expect to finance the transaction.
14. Communication
• Make your offer (non-binding Letter of Intent)
• Consider explaining material assumptions you have made
• Do not provide seller with your model
• Make sure that the seller understands that you are structuring this deal to
make a profit
• Make sure that you have the right to perform due
diligence
• It is standard to get to kick the tires
• Set the expectation that this process may result in an adjustment to the
purchase price.
• Provide a timeline for completion
• If you are very far apart on the pricing, then move on to
the next opportunity.
15. Avoiding Traps
• Don’t get caught up in a deal or attached to the company
• Get appropriate transition help from the seller, but don’t
leave seller with authority
• Watch out for non-owner sabotage
• Watch out for owner dependent businesses
• Be aggressive. The seller will be.
• Use professional help (attorneys, CPAs)
• Communicate fully with your own management team.
• Insist upon early communication with the management
team to be acquired.