Finding A Small Company to Buy & Making the Deal
June 4, 2008
Some of the best opportunities in small company purchases are not even listed for sale. Here’s how you find them and how you protect yourself as you move closer to purchase.
Finding Targets (3 key points):
1) make sure you, or your client, knows what kind of prospects you are targeting. Establish a criteria checklist with 3-5 “must have” criteria and as many “I’d like” criteria as you want. Immediately walk away from any prospective company that does not seem to have all your must have list.
2) ask your client’s contacts in the target industry who they would want to acquire, who they admire and who to avoid (many of the best deals never get listed for sale anywhere). Qualify these prospects against your must have list and ask them if they might consider a sale.
3) team up with a good direct mail list broker and find out what companies are in your target universe, and your most desired locations. There are more companies out there than you know. Do a blind survey to see if any might consider selling. Qualify those who do and go from there.
Due Diligence (7 key points)
Confirming your “must haves” – checking the facts presented is not enough – even though you have initially qualified your prospects, you have to dig deeper. Due diligence is hard for smaller companies where public company comparisons are not often meaningful and financial (and other) disclosures might not be apparent or complete:
1) review financial, marketing and operational information on any smaller company you contemplate acquiring. Pay attention to the details. Check out anything that looks odd. Small company owners often do not make clear distinctions between their pockets and those of the company. If you and your accountant are not good ferrets, use an acquisition consultant to sniff out any discrepancies.
2) recast their “numbers” to reflect any changes in value due to newly discovered issues. If the owner balks at adjusting the price, or won’t negotiate, walk away.
3) spend time with key executives and staff in the company to be acquired. If you have doubts about them and their continued performance is a critical part of the package, move on to the next prospect.
4) if you find there are people at the company you like and want to keep on, not including the former owners, offer them employment contracts that match or exceed what they already have. Get these contracts signed and make their continuation a contingency of the sale.
5) most small sales are installment sales. Make sure you have controls to ensure you are getting what you paid for throughout the deal. Build in escape clauses and/or performance adjustors as safety valves.
6) even if you want to keep the previous owners in place over time, the odds are against it working. Be very careful buying a business whose future success is tied to a former owner over a long term.
7) And even then, after you’ve done all your homework and it seems to add up, if you don’t feel right about the deal and its potential when you sit down at the settlement table, remember it’s not too late to walk away.
John Reddish works with entrepreneurs and other leaders who want to master growth, transition and succession to get results faster, less painfully and in ways that work for them. For information and/or additional similar content go to: www(dot) getresults(dot) com, or call 1.800.726.7985.
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