The Complete Guide to Buying a Business
By Fred Steingold J.D.
Assumptions form the foundation of every facet of an M&A transaction. They permeate every fiber of a deal. Sellers make assumptions. Buyers make assumptions. Lawyers, accountants, wealth managers, and other advisors make assumptions. Deals are built upon assumptions. When assumptions are thoughtful, reasonable and defensible, there is a much higher likelihood of success.Buyers may assume they can get three turns of EBITDA in senior debt and another turn of second lien debt when determining both valuation and deal structure. However, what happens to the deal if those assumptions prove faulty? Assumptions should be tested. Before proceeding, apply a reasonable test.Determine if the assumptions will survive further scrutiny. Are they defensible? If they are not, challenge them and make the appropriate course correction.
Buyers often use Discounted Cash Flow (DCF) as at least a data point to derive a valuation. However, as any finance student or professional will tell you, DCF is limited by the inputs; the assumptions you make. One has to make assumptions as to the cash flows derived by the business, a terminal value, a growth rate and their cost of capital. Each of those is a lever that a seasoned professional can pull to move the results. So, the results are subject to confirmation bias. I can make the model spit out a number that aligns with my preconceived notion as to value. Further, I can make the results provide evidence to a narrative that portrays the business in the most positive (or negative) light. Again, assumptions matter. They need to be reasonable and defensible.
Sometimes we will see buyers assume that all businesses in a specific industry are perfect substitutes. I’ve seen buyers point to other sellers on the market with more “reasonable” price expectations. But that assumption, on its face, is flawed at best and perhaps intellectually dishonest. No two business are alike. They are living, breathing beings with unique people, processes, supply chains, distribution channels, relationships etc.Two businesses that compete with similar services or products will yield different valuations from buyers. Those differences in valuation may be vast. Why is that, you ask? The answer is businesses are not fungible. They are not interchangeable. They aren’t gold, silver, frozen orange juice or any other commodity. They don’t trade purely on price as they have unique aspects to them. As such, we at Benchmark, as a sell side mergers and acquisitions firm, really thrive when we encounter a buyer with this argument. We love it when a buyer brings that level of analysis to defend their assumptions. Our clients do too.
Assumptions matter on the sell side when contemplating net proceeds. Every seller concerns themselves with the amount they will take home once all fees and taxes are accounted for. More importantly, they want to know if they can “live on” those proceeds. When considering this question, make sure all of the inputs into the waterfall are reasonable and defensible. The waterfall demonstrates the net proceeds to the seller accounting for all expenses and taxes. Are your tax assumptions correct? Make sure you engage advisors that understand transaction tax. Your CPA may not be qualified to dig in here as the questions and answers aren’t black and white. Often times, the sell side law firm has an M&A tax specialist on the team and that person may be best suited to assist.
Let’s address the aforementioned question; how much do you need at closing to maintain my lifestyle? Again, as before, the assumptions here matter. You may not know the market opportunities available to you post-close as perhaps you’ve never had the power and influence that may come from a sizeable pool of investable capital. We suggest sellers speak to wealth advisors to determine if their risk tolerances and investment goals align with the cash flow they require. We have worked with wealth managers that specialize in working with small business owners transitioning out of ownership for the first time. They will work with you to determine the proper asset allocation for your proceeds and provide the basis for sound assumptions as to rates of return. They will also review your entire financial profile and exposure to assist you.
Assumptions matter for your advisors. Attorneys may mistakenly assume a seller is adamant about an issue that may in fact be unimportant to the seller. Other advisors may apply their own biases to a deal and assume both buyer and seller think as they do. I’ve found that making this sort of assumption, that buyers and seller think as I do on all matters, leads to poor guidance and poor decision making.
So, what is the cure for all of these issues that result form poor assumptions you ask? Simply ask the other party, whether on other side of the transaction or on the same side, to present and defend their assumptions. Once the assumptions are on the table it is easy to test them to determine if they are credible, reasonable and defensible.READ MORE >>
Maybe you are a lot like Sam. Sam has been working at a job that he doesn’t love, going to work each day and feeling unfulfilled. Sam would really like to quit and go into business for himself but he has a wife and a child to support. This leaves him with a big decision to make; should he start a business or buy an existing one? As Sam does his research, he discovers the many factors that will influence his decision.
Sam, like many of us, has a family to support so most important to him is to have sufficient income to continue supporting his family. Taking on the risk of possibly not generating any income for several years with a startup is not a realistic option for Sam. Since starting up is not an option for Sam, buying an existing business will allow him to have the necessary cash flow from day one as he will be taking a salary directly from his business. In addition, depending on the way he chooses to acquire his new business he will be able to keep investing back into the business so it can continue to grow. While Sam understands that there will be many headaches and long days because of his new business owners he will be free to be his own boss. Furthermore, this new business will likely relieve a lot of the financial stress that he currently has as his family’s expenses continues to grow.
Like most people going into business for themselves, Sam will need to secure financing and/or attract investors to help him get started. He quickly learns that banks and investors strongly prefer dealing or lending to a business that has a proven track record and strong historic financial performance rather than a higher risk start up business with so many uncertain factors such as high debt, or customer concentrations. With the right guidance from a reputable M&A firm such as Benchmark International, Sam will be able to find financing to be on his way to fulfilling his dream of business ownership.
Like many young entrepreneurs, Sam is excited and motivated by the idea of growing a business. He understands that there is a marketplace for businesses he is currently looking for and is much less interested in the grueling legwork and struggle of getting one up and running. He knows that buying a business will give him an established brand that has been tried and tested along with any patents, copyrights and valuable legal rights that may come with that. Having acquired a business, rather than starting one, will have be doing the work he is most passionate about from day one.
Sam’s wife Helen is a very active member in their community and their home is usually filled with family and friends. Like many of us, friends and family are very important to Sam and he wants to make sure he will still have time for those things and does not miss out. Sam is especially enthusiastic about four children’s school activities. He realizes that by buying an existing business, he will have an established vendor, customer base, goodwill, equipment and suppliers. Things he would otherwise need to spend countless hours acquiring. Sam will also have an experienced and trained staff in place ready to go that will know and understand the business so he can take a couple of hours and see his children flourish. The seller has spent time teaching and training those people and Sam will reap the benefits of that. From day one, he will have people in place who are able to help run the business and teach him things while he gets settled in. Sam understands the target business and he knows that with a few tweaks and changes here and there it will be running the way he wants to in no time. While at the same time being able to spend the evenings at home with his wife and kids.
Business ownership may seem like a daunting thought but it really should not be that hard. Sam’s experience shows us some of the things to think about when making such an important life decision.
So, what about you? Are those advantages important to you as well? Do you have a unique idea that may be easier to get off the ground by incorporating it into an existing business? As we move into a time where more and more baby boomers are looking to retire and sell their businesses, the opportunities are endless for budding entrepreneurs. Your time may be now!
And what happened to Sam you wonder? Sam did make the decision to purchase an existing store rather than start his own and was very successful in growing it. In fact, Sam Walton grew his Wal-Mart stores to be the largest retail chain in the United States. What business will you grow?
CBInsights has published its annual survey on 2018 corporate venture capital (CVC). Globally, 2,740 deals were completed raising $52.95 billion. This equated to an increase in capital raised by approximately 47% over 2017 and deals increased 32% over the same period. The average CVC deal size reached an all-time high of $26.3 million.
Looking at quarterly trends, Q4 2018 saw the highest number of active CVCs ever, with 429 CVCs investing in the quarter. This number represents 59% year-over-year growth, up from 270 active corporate investors in Q4 2017.
By sector, CVC investments in internet start-ups and healthcare companies increased significantly. While deal activity also increased in Asia, the most noteworthy increase came in the United States with 1,046 deals completed in 2018.READ MORE >>
Expanding into new markets around the world is an exciting opportunity for business growth. But where do you start? There are several factors you will need to consider when undertaking a venture of this magnitude.
First and foremost, you will need to determine if expanding into a new country will be profitable. Identify your target market and assess the need for your commodity in that market. Perform a product gap analysis or SWOT analysis to determine demand and how your product or service stacks up to local products. You basically need to determine whether anyone will buy it, so it can be a wise move to test your product in that market before going any further.
Create a localized business plan to evaluate your preparedness for the venture, and set reasonable goals for the process. Expanding into new markets is akin to starting something new and it’s going to bring a new set of challenges. Consider if you need to create a new executive team to help manage the transition or if your existing team can hit the
One of the most important steps you can take in expanding to a new market is to make sure you take the time to understand the country’s culture. Etiquette, language, and business culture can vary greatly and impact the success of your endeavor.For example, make sure your product or business name translates appropriately into the native language.
You will also need to think about the country’s logistics and how you plan to distribute your product or service. Consider legal regulations, tax laws, insurance needs, banking transactions, transport costs, data protection, and labeling requirements. You should also protect your intellectual property by looking into trademarks, patents, and design rights. Hiring an international business consultant can help you avoid any pitfalls and ensure that all your bases are covered.
Taking a product into new markets also means understanding the ins and outs of exporting. The good news is that it’s often in the best interest of most governments to boost exporting, so seek out ways that they can help you with market research, trade support, and exportation training programs. This information is typically available on government websites. You can also contact trade commissions, chambers of commerce, and other organizations
If you plan to acquire an existing business, you will need the proper guidance from an experienced business acquisitions firm to help find the best opportunities and broker a successful deal. There is plenty of due diligence required to adhere to local laws and make sure the terms of the acquisition suit all parties involved. At the same time, the right acquisition can be quite advantageous and reduce some of the risk that comes with an international venture. The business to be acquired has existing infrastructure in place and understanding of the local market’s regulations and relationships, offering some stability to a complex process. A sound strategy can make all the difference when buying a company.
There is a great deal to manage when expanding a business internationally, but you don’t have to do it all alone. World-class business experts with strong global connections, such as Benchmark International, can help you analyze the market, navigate the process, and tackle the world.READ MORE >>
Many individuals or companies feel that the best way to either enter an industry or expand within an industry is through buying a business. While this is often true, it is hard to know where to begin the process of buying a business.
Define your search criteria?
The first step to buying a business is comprise a list of features that you are seeking in a business. Similar to the car buying process. Do you want leather seats, a certain brand, navigation, power windows, etc? Narrowing your search criteria will help save you time, resources, and frustration.
Here’s a few questions you will want to be able to answer as you begin your search:
- What size business are you seeking? This question relates to both revenue and profitability.
- Do you want the owner to remain apart of the business post-closing? If so, for how long?
- What geographical areas do you prefer?
- What industry and sectors are of interest to you? Be as specific as possible. If you are looking to buy a marketing firm, what type of end customers do you prefer? Do you want the business to cater to government customers, healthcare companies, etc?
- What is your budget?
Begin your search
There are many ways to uncover businesses for sale. You can search various websites, reach out to a Mergers and Acquisitions’ (M&A) specialist, or network to try and find deals that have not hit the market yet. Some buyers will approach business owners directly to see if they are interested in selling their business directly to the buyer.
Websites featuring businesses for sale often can be overwhelming. If you search several websites, you may see the same listing on multiple websites.
There are M&A specialists that work with buyers to find businesses for sale and others that work with sellers to find buyers. Some M&A specialists represent both buyers and sellers. If you are working with a specialist that represents both parties in a transaction, you will want to understand the intermediary’s incentives. It is hard to keep interests aligned if there are conflicts between the parties. If you are working with a sell-side M&A specialist, often times they will have exclusive listings meaning that you can only have access to that specific deal through that specialist. Also, a sell-side M&A specialist may take a commitment fee. This will show the seller’s commitment to the sale process.
Some potential buyers build a network to look for opportunities to purchase businesses or build their own database of potential businesses they would like to purchase and begin reaching out to those business owners. While this sounds like an easy process, do not be fooled by the amount of time and resources you will use trying to speak with the business owners and convincing them to complete a deal with you. Typically, business owners that are open to exploring the idea of selling will entertain a conversation but they eventually want to go to market to test the valuation. Often times buyers will get close to the end of a transaction but then the seller will decide not to sale. If you are willing to pay an amount that is acceptable to the seller then they often wonder if there is someone that is willing to pay more and if they have undervalued their business.
Begin to review businesses
Sellers will want a Non-Disclosure Agreement (NDA) in place prior to releasing confidential information. This practice is very typical in the lower mid-market. As a buyer, you will want to have the opportunity to speak directly with the business owner. They will know their business better than anyone, and you will have specific questions that only the business owner will be able to answer. You will also want to visit the business' facility. This visit will tell you a lot about the company, its culture, and what type of liabilities you may want to explore further during the due diligence process. Once you find the perfect business, you will want to move swiftly to the next stage of the purchasing process as there are probably other buyers looking at the same opportunity and you do not want to miss out.
I found the perfect business, now what?
After you find the perfect business, you will need to comprise a valuation for the business. The valuation will be covered in a Letter of Intent (LOI) as well as the structure (how is the valuation going to be paid to the seller) of the offer and other high-level details. In the LOI, you will want to include the seller’s involvement post close, an exclusivity clause allowing you the exclusive right to review the opportunity, the requirements of due diligence along with a timeline, if possible, and the anticipated closing date. A LOI tends to include many more details but above highlights some of the details a seller will want to understand prior to agreeing to move forward.
The LOI is executed. Where do we go from here?
After a LOI is executed, due diligence begins. As the buyer, you want to confirm that what you think you are buying is what you are actually buying. You will want to understand the risk associated with the purchase of the business. You will also want to engage your advisors to provide legal advice for the purchase agreement and tax advice for the structure of the transaction.
While purchasing a business sounds like a quick and easy process, it can take months, if not a year or two, to make the purchase. There are a lot of factors that you will encounter and unforeseen obstacles that stand in your way. An M&A specialist can help you navigate these obstacles and help you purchase a business within your desired timeframe. Whether you choose to seek to purchase a business on your own or bring in a M&A specialist, we wish you the best of luck with your journey.
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A recent article in the Harvard Business Review made a perhaps surprising conjecture: that as far as mergers and acquisitions are concerned, those companies that focus on what they’re going to get from an acquisition are less likely to succeed, in terms of the deal outcomes, than those companies that focus on what they can give to the process.
Acquiring companies being in ‘take’ mode was a dangerous place to be, it claimed. Indeed, corporate giants are not immune from this conundrum either, if we think about, for example, Microsoft and Google wanting to get into smartphone hardware in ‘taking’ from Nokia and Motorola respectively.
A buyer in ‘take’ mode means that the fortunate seller can increase price, especially if there is more than one potential buyer in the picture, and effectively remove the future value of the transaction. Buyers on the take, really knowing what they want, are also more prepared to pay top dollar – which, in and of itself, poses a problem in eventually getting a good return. But companies with a ‘getting’ focus also tend to lack adequate understanding of their new markets, making failure even more likely.
Having something to give to the deal, however, really benefits outcomes. This could mean anything that makes the acquired company more competitive in its market, and especially if the buyer is the only partner who can offer this new competitive edge.
The much-talked-about Harvard Business Review article listed four main ways that the ‘giving mode’ buyer can increase the competitiveness of the bought company and ultimately secure better outcomes on the deal:READ MORE >>
As stated on Benchmark International’s website, our perspective makes us different. We strive to help clients reach their maximum value for the sale of their business. To accomplish that goal, it’s important to also have good buyside perspective.
Buyers look at companies differently than sellers and some advisors. Certainly, a company’s financials are a common barometer for both sides to gage a company’s performance and success. And cultural fit is a must. Beyond those metrics; however, buyers prioritize characteristics to mitigate investment risk. These characteristics include, scalability, stability, resiliency, and the ability to grow.
Scalability is about a company’s ability to accommodate growth – to behave as a larger entity. Some acquisitions result in smaller companies becoming part of much larger organizations. The new structure sometimes brings new processes, systems, and reporting requirements. These changes in scale can introduce risk if personnel lack the bandwidth, appetite, skills, or resources to ramp up. Buyers seek assurance that the team is adaptable and capable of scaling.
Many investors also seek stability. The project-based business with wild swings in revenues or heavy seasonality, for example, presents significant challenges in performance, planning, and execution. For most investors, consistency is vital and this is often tied to a company’s revenue model. This is a key reason why buyers prefer recurring revenue models. For industrial services businesses, long-term or preventive maintenance contracts provide recurring revenue. Many equipment manufacturers have transitioned to providing a service rather than hardware. For example, some compressor manufacturers retain the physical asset and provide an “air as a service” guarantee for a monthly fee. And software companies achieve this by transitioning to a subscription, or software as a service (SaaS) model. Together with a “sticky” customer base – high switching costs or risk – these all provide a level of revenue stability that might otherwise be absent.READ MORE >>
You’re sitting at your desk eating your lunch and reviewing the emails in your inbox when your phone rings. You pick up, on the other end of the phone is an inquirer looking to purchase your company. You haven’t given much thought to whether or not you’re open to selling your business, and here is someone who is ready to purchase it right now. What do you do?
Engage the Right Support Team
First things first, congrats! You might not be thinking to sell right now, and that’s okay, but now you know there is interest in your enterprise. If this inquiry has sparked curiosity in you to explore the possibilities of a sale, you need to be prepared. How do you approach an offer for your business out of the blue? Well, you don’t go into it alone, that’s for sure. You need to have the appropriate team in place to assist you should you decide to explore your options. You will need a sell-side mergers and acquisitions specialist to help you navigate the waters of a sale and break down your options for you.
When it comes to selling your business, it’s okay to acknowledge that you don’t know what you don’t know. Having a mergers and acquisitions firm on your side can help you determine what the approximate value of your business is against others in the same market. Furthermore, you can discuss what your aspirations are for your business and what you hope to achieve from a sale.
What Do You Want?
A call that catches you off guard might have you thinking what the buyer’s intentions are, but you need to think about your intentions. If you consider selling your business seriously, what do you want from a sale?READ MORE >>
You have worked hard to build your business from infancy and bring it to the success it has achieved thus far. Taking your business to the next level feels like the right thing to do, but your personal load is getting larger and larger, so how can you do that? You are nearly maxed out as it is. You knew starting a business would be hard and growing it would be even harder.
Should you sellout completely? Should you find a partner? You are probably beginning to explore your options. One option, that will make your job easier and help you find a partner who can take your company to its full potential, is using a mergers and acquisitions firm to help you find a buyer that will fulfill your vision for your business, through a strategic acquisition.
A strategic buyer is a buyer that acquires another company with optimal synergies to create an end business that is greater in value than the two companies standing alone. Often, these buyers will pay a premium for businesses as their goal is to gain more value than the intrinsic value of the company being acquired. In other words, the goal here is to make one plus one equal three.
You might be thinking you can find a partner yourself and paying for outside help doesn’t seem very lucrative. This is where you are wrong. An advisor is essential to finding a partner who can help you grow your business in the way you want. Additionally, a mergers and acquisitions firm can negotiate on your behalf to make sure you gain the most from a strategic partnership or acquisition.
Finding the right type of partner is key. Using a sell-side mergers and acquisitions firm will allow you to have access to a myriad of potential buyers who can help take your business to its full potential. Moreover, a sell-side advisor keeps your needs at the forefront of all they do throughout the entire mergers and acquisitions process. Your best interest is their best interest, so this is an important aspect to keep in mind when looking for an advisor to help with the sale of your business.
There are multiple ways to grow through strategic acquisitions. A strategic acquisition doesn’t limit you to looking at potential buyers only within your industry. You may find the best way to grow is to find a company that compliments yours. Your company may be the missing piece needed for a larger business to continue growing effectively, which gives you an advantage in sale negotiations.
Partnering up with a competitor or complimentary company within the same marketspace will also allow you to expand your professional footprint. A strategic buyer wants your business to succeed just as much as you do, and they see the value your business has to offer.
Of course, you want your business to continue being successful. Therefore, you need to continue focusing on its growth and investing your time into the business itself, not a transaction. You will save money short-term, but you will lose hours upon hours of time if you try to sell or merge your business on your own. Moreover, you could unintentionally fall behind on the business end of your operation, and this can negatively affect the value of your company, resulting in money lost.
Benchmark International is a mergers and acquisitions firm with decades of experience. We have closed over 500 transactions across more than 30 industries. We are a sell-side M&A firm always putting our clients first. We focus on selling the business for the highest value and find you a compatible partner, so you can focus on managing your business.READ MORE >>
Benchmark International sponsored and attended the 2018 Texas ACG Capital Connection event in Houston, Texas from March 28 to March 29. Texas ACG Capital Connection is known as the most significant private equity and debt capital event in Texas and the Southern United States. It is also one of the largest ACG Capital Connections in the United States.
Benchmark International’s Managing Director, Kendall Stafford, feels that these types of events are essential to the team’s professional development and growth, and offer Benchmark International the opportunity to present their clients’ opportunities to many buyers. “These events allow us to connect with financial buyers across several industries, states, and countries at the same time,” she said. “Additionally, members of our team can attend keynote speaker sessions and they can share what they learn with the rest of the team, so we can focus on trends in today’s M&A market.”READ MORE >>
Benchmark International facilitated the sale of Weigelt Enterprises, LCC headquartered in Buda, Texas with additional locations throughout Central Texas. They were acquired by an undisclosed financial buyer based in Austin, Texas.READ MORE >>