All companies try to grow organically. But depending on your industry’s maturity, it’s not always easy to grow from within. One way to supplement this is to acquire another company to gain market share, says John Troyer, CPA, Audit and Accounting Services Department, Partner-in-Charge at Ciuni & Panichi.
“For companies that want to grow their topline, and hopefully their bottom line, acquisition can be the easiest path,” he says.
However, strategic buyers, especially those who are new to these transactions, need to make the right moves to ensure a ROI. This is critical in today’s seller’s market.
Smart Business spoke with Troyer about what business owners need to remember when doing an acquisition.
Is now a good time to buy a business?
There’s a lot of capital in the market. The economy is strong. So, companies have good cash flow to finance an acquisition and banks are interested in lending to their customers. But in the near future, it should remain a seller’s market — even with baby boomers without strong succession plans looking to sell. Strategic buyers are competing against financial buyers, like family offices or private equity firms, which drives prices up.
How do you find a company to buy?
Look for a business that complements your industry, product lines, customers or geography. If you buy a competitor, there’s a double benefit as you reduce competition in your existing sales space. Another target could be a supplier. Vertical integration reduces uncertainty in your supply chain.
Consulting a team of advisers certainly helps. Business brokers specialize in sales transactions and can identify available companies. Meet with your CPA, attorney and banker, and express your goals and objectives. Professionals usually have large networks and often are the first to hear a company is on the market. They also can advise you how to finance and structure a transaction.
What happens when you identify a target?
It helps to have an existing relationship before you start the conversation with a target company. The seller likely will require a nondisclosure agreement. And you, as the potential buyer, will want to negotiate a letter of intent — with the help of your advisers — to make sure the buyer is serious and realistic with the price. Sometimes emotionally attached sellers have an unrealistic view of their company’s worth.
Perform your due diligence to understand the strengths and weaknesses of a potential acquisition. An experienced adviser can identify risk and opportunities in the information provided by the seller.
How do you determine a fair sale price?
There isn’t one way to value a company. You can project the future cash flows, or look at historical cash flows, similar private transactions or the book value. Whatever method, the sale price should be set using sound financial data. There’s risk with all transactions, so make sure your projected ROI justifies what you pay.
Again, surround yourself with advisers who have been through transactions. Try to take the emotion out of it. You don’t want to be on the wrong side of a transaction — where the other side is experienced at making a deal and on your side, there’s inexperience.
What else do strategic buyers need to know?
With the rise in valuations, it can be hard for companies to find what they’re looking for at a good value.
While a private equity firm could be looking at a shorter ownership window, it’s harder to flip a company at a profit in a seller’s market. Sellers typically are looking for more cash up front, but a strategic buyer also may appeal to their emotions. A lot of sellers want a buyer who will be loyal to their employees and around for the long haul. Some sellers want to see their legacy carry on, and not be swallowed up by a larger company where the name goes away.
Buying a company takes significant capital. You have to be confident in your ability to run the new company effectively. Have a plan for the operations. Go into it with your eyes wide open, so that the acquired company is a positive contributor to your cash flow. If you’re losing money, it’s not only problematic, it can also cause you to take your eye off the ball of your existing operations.
Insights Accounting is brought to you by Ciuni & Panichi, Inc.