After five years of receiving multiple inquiries, some concluding with “not interested” and “let’s talk later,” an industry competitor approached me on the possible acquisition of his firm. The competitor stated an asking price that he felt was fair for his business. Like most valuations by business owners assessing their own company, the asking price was far more than the value of the business. I told him he must get a business valuation to learn the real value of his business in the current marketplace.
I also needed to determine the proper multiplier of EBITDA (earnings before interest, tax, depreciation and amortisation) for this type of business to calculate a fair price. After the valuation and review of his financial statements for the previous three years, I presented the buyer with a non-binding offer (letter of intent).
Some lessons I learned through this process include:
• Do not become emotionally attached to the deal (i.e., always be able to walk away, if what you need to make the deal work for you is not met) to maintain your advantage during the acquisition process.
• Prepare a detailed list of benefits if you acquire the company. These benefits should be categorised by sales, staff, product mix, etc.
• Prepare a detailed list of challenges that will be faced to assimilate the business into your operations.
• Do not hold acquisition meetings with the seller in your office. These only create gossip and conjecture.
• Define sales projections and possible revenue streams that may or may not continue when the business is purchased. Predetermine how much the value of the business would decrease if the projections are not met or a revenue stream is reduced. The deal then should be structured so that payments for the purchase of the business that are made in future years would be reduced if the projections are not met or a revenue stream is diminished.
• When buying inventory assets, portions of the inventory that cannot be sold over a defined period of time should then be offset by a reduction in the price of the business. This can be achieved by reducing the purchase payments in future years.
• Think through all current assets and understand who owns which assets after the deal is completed. For example, the seller may think that the cash in the business is his and will be taken out at the time of the sale. The cash is part of the business and should be left in the business as working capital. If the seller keeps some or all of the current assets, the sales price should be adjusted appropriately.
• Hire a CPA and lawyer who are experienced with the acquisition process to help you think through the deal and save you money as well as big headaches.