Buy or Die?

If you plan to transition ownership of your business one day, you likely hope to maximize the value of your business at the time of transition. Many tools can increase the value of a company, but one of the most effective methods is acquisitions. Here’s what you need to know about this strategic growth opportunity.

Build, partner, or buy?
​Entering a new market can multiply your growth rate and increase your business value. You can enter a new market by building your business internally, partnering with a company in the desired market, or buying a business that operates in the target market. Should you build, partner, or buy? Determining how much time you have, how much each option would cost, and how much risk you’re willing to tolerate can help you decide. If it is faster, cheaper, and less risky to acquire, that may be the best option for you. But if it is faster, cheaper, and less risky to build internally or partner, it may be smarter to pursue organic growth. 

Is the price right?
​Unfortunately, many acquirers are inexperienced in doing deals and overpay when making acquisitions. They often focus entirely on the math, such as a multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA) or revenue. These numbers are important, but determining the right price is much more complex than using a single method or metric.

When determining a favorable price for acquisition success, it’s wise to negotiate with a seller who is motivated to sell (and walk away from sellers who are on the fence). Some business owners compelled to sell have complications in their life that increase their need to sell, such as the following:

• The owner has complex financial challenges. Maybe the owner is going through a divorce, but the business is an asset owned by both spouses.
• The owner has an urgent need for capital. If the owner has a debt that must be paid off, receiving some quick cash could be a no-brainer.
• The company lacks needed resources. Perhaps the owner has just signed on a new customer, but the owner is concerned the company can’t provide the promised results.
• The company lost an internal successor. Maybe the passive owner was getting rich off of a young executive’s hard work, but the executive quit and left the owner high and dry.
• The company needs new blood. If the owners’ delegation attempts flopped and they’re back to working 60 hour weeks, being acquired might sound good to them!

The Wealthpreneur Lesson

Ask Before You Acquire

In my experience, many successful acquisitions begin with asking the right questions. These 5 questions will help you best position your company for a profitable acquisition.

#1: Do you have superior information? For example, you might be able to access customers that the target firm cannot reach. 

#2: Are you the only bidder? Owners that operate their companies as lifestyle businesses often have difficulty attracting buyers. If you are the only bidder, you can more easily dictate the price and terms.

#3: Is this a recession? Recessions are fantastic for well-run companies, but challenging times for poorly-run businesses. During a recession, some businesses get in trouble and need a lifeline to stay in business which makes them ideal acquisition targets.

#4: Is the business “sick”? If you are bargain hunting, underperforming business can be more attractive than well performing ones. You can buy a “sick” company for a low price, enter the new market, cure the “illness”, and thrive!

#5: Does the seller care solely about price? Many founders see their business as more than financial vehicles. They care deeply about their customers, employees, and legacy and want them to be well cared for post-acquisition. An idealistic founder is often favorable for an acquisition, but a mercenary founder focused only on money will likely demand a steep price.