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In my previous article, I shared my thoughts on why entrepreneurship by acquisition (ETA) could be a more lucrative and less dangerous route than building a startup.
We discussed the wide selection of options for purchasing a business as baby boomers – who make up the majority of companies across the United States – look to retire and sell their businesses to the next generation.
Once you’ve decided whether you’ll support your efforts through a search fund or self-funding, it is time to consider what kind of company you want to buy and how to find and acquire it.
Where to start
The most vital step is to determine what industry or market you are interested in or where you consider you can contribute significant expertise.
If you use a search fund structure, your options could also be limited by the parameters set by investors as they may have the best targets in mind, especially in the areas they are most comfortable with.
If you’re self-funded, the sky’s the limit: you can look inside your comfort zone or take a risk with a company that can test and challenge you, but may bring greater financial returns.
Where to look
You could also be surprised to hear that finding recent business opportunities could be difficult if you don’t know where to look.
Here are some ways to find the best results.
- Network: If you have self-funding resources and are focusing on a specific industry or region, you can look inside your network to see what could also be available there. There’s no shame in opening up your LinkedIn Rolodex and putting out the feelers. Most people want to help, even if it’s so simple as sharing information they have.
- Service providers: Accountants are typically the best source for off-market transactions because they know business owners’ financial plans best. If you find an experienced attorney in this area, they can be a great resource.
- Regional investment banks: The sole purpose of this group of economic institutions is to help potential entrepreneurs find corporations to buy. Initially, you can only access offers approved by others. Build relationships to see offers before others.
- Direct range: This is where your due diligence skills come in handy. As it seems, you discover corporations and call them directly to ask about their status and whether or not they is likely to be interested in selling. It’s effective but time-consuming, and you’re also talking to folks that other search users could also be viewing.
- Industry associations/groups: This method is higher suited to industry-specific searches. You can contact the heads of associations or networks inside the group.
What to concentrate to when taking on a company
With so many options, it’s hard to narrow down your search.
I like to recommend looking for opportunities in more traditional industries equivalent to manufacturing, industrial services, or even IT corporations serving traditional sectors. You’d be surprised how many profitable corporations you’ll find here that individuals often forget about.
You’ll want to research industries that interest you and those who have high growth potential that you can unlock by showcasing your skill set. If you have prior experience, that is even higher, as you’ll have the option to higher understand market trends and map out the competitive landscape.
Discovering useful details
Unfortunately, the search becomes more and harder as you select the company you are interested in.
Most of the high-level information you need could be obtained by signing an NDA. This typically includes revenue volume, growth, profitability, employment and valuation scope. The process includes contacting the company, making an initial telephone call to gauge interest, signing an NDA, gathering financial information, determining a valuation and submitting an LOI, conducting due diligence, preparing acquisition documents, and closing the transaction.
Alternatively, you can set stringent search parameters to find only corporations that meet your criteria. This will help you stay disciplined throughout the search process and avoid wasting useful time on business owners who are simply “testing the waters.”
Potential search parameters may include specific EBITDA multiples or valuations you are targeting, growth levels, specific assets, debt levels, or other useful data.
Key person risk
If you’re pleased with your financial health, it is time to look at your enterprise operations and assess the strength of your management team.
Key person risk is the most vital risk when purchasing a small business. Many corporations cannot function without a CEO or someone from the management team. Often, the CEO is the primary person maintaining relationships with suppliers, customers, and others. So when they leave, these key relationships can do the same.
You should try to discover this as early as possible so as not to waste useful time discovering that the risk associated with a key person is too great.
Understanding the company and its people
It’s also a great opportunity to see what features of their current business are working and what aren’t, and what recent ideas you can implement that would build on the company’s foundations.
Take time to understand the people and the culture. Do this company’s values and vision align with yours? Are they even close? It is unwise to buy a company you do not believe in, even if the business is crucial.
Work closely with owners to understand the motivations and morale of their employees. Spending this time can provide you a good sense of culture.
Financing potential transactions
Once you’re sure you’ve got the best company in line to buy, it is time to make sure you have the financial resources to bring it home.
If you’ve chosen to seek funds, now is the time to talk to investors about committing money to the deal. In 90% of cases, it would be a combination of investor equity and loans. If you’re considering a loan, talk to loan officers or bankers before you find something. Find out how they underwrite and what they appear for so you know how much debt you could find yourself with if you find anything inside their parameters.
Like many entrepreneurs, you may invest in your personal funds or borrow from family or friends to help you get began in the short term.
What’s next?
Once you’ve accomplished your search and made your purchase, it is time to focus on the next phase of ETA: taking ownership and running your enterprise on your personal.
In the next article, I’ll describe the most vital aspects for a smooth transition and how to ensure it goes well for you, the previous owner and the business. We’ll also explore how to approach running your recent business the way you want while honoring the legacy you’ve inherited.