Advice on Buying a Business

[topfiverecords]

Originally Posted by Mickey76

Not to be negative on your idea and I am sure you know what you are doing but I would say don’t do it. Buying a business is perilous, especially when buying businesses is not your business. People who do this for a living look at 100 to buy one. You found a business you like and are thinking we should buy this and could do well at it. The likelihood of this particular business being the one in 100 that makes sense is very low. I am off to yell at the clouds.

I’m not 100% sure but I think KTrain is already running a similar business.

[KTrain]

Yes, I have a business already in a similar space and a relationship with the business we're looking to buy. My partners also have a history with the company so it's not a completely unknown product.

That said, there have been a bunch of questions posed in the thread that I need to give more thought to. We're in the initial stage of getting all their information and my list of requests is getting quite long because of the comments in here.

[DoubleF]

As others have said, I think it's along the lines of:

1. Why is business selling?
2. How was the business valuation determined?
3. Was the data used in the business valuation reliable? (Were financial statements audited vs NTR vs bookkeeping data only; ie: risk of material errors in financial information)
4. What are expected events after acquisition of the business?
- Expected loss of customers/revenue by percentage or $ value? (See #2)
- Expected obligations to maintain? (Leases, staffing, pensions, debt etc.), and were those built into the valuation?
- Pending lawsuits, litigation, issues with regulating bodies etc.
5. Is the business up to date with all its requirements?
- Tax filings
- Registrations
- Governing body related stuff
6. Does it make more sense to buy a company's assets or the company shares?
ie: Asset purchase = bump up in asset value
ie: Share purchase = may inherit some skeletons in the closet
etc.

I am assuming you are already looking at financial information at this point and have signed non-disclosure agreements to look at them.

[GP_Matt]

I have been the lead or second on purchasing three companies that we wanted to integrate into our operations. In one case, the owner was retiring and put out feelers, in the other two, they were in markets that we wanted to enter and purchasing was evaluated against building the market ourselves. All three have been successful so far.
In all cases, I interviewed every staff member, contacted their top ten clients and we did a full review of financials going back several years to come up with a valuation.

The client/staff interviews are important and give you a real sense of the viability of the company. We also reviewed every single contract that the company had signed to cover any outstanding obligations and met the landlord if any leases were coming due.

The risk to this process is big on the sellers end though. They have to tell their staff and clients that selling the company is a good idea so if the deal falls apart it could be hard to walk that back. There is also a tipping point where the deal has a ton of momentum but terms are not yet finalized and it is a good idea to build a gut check into the process to avoid being blinded by the prospect of closing.

[marsplasticeraser]

Originally Posted by GP_Matt

In all cases, I interviewed every staff member, contacted their top ten clients and we did a full review of financials going back several years to come up with a valuation.
.

I don’t know your industry, but this type of access to talk to employees and clients (or key suppliers) is not common in my experience. If you can get it then do it, as that’s the best info you can get.

[flamesfan1297]

I don't know too much about this subject, and it may have been mentioned already, but have you looked into getting the current owner to sign a no compete clause?

You don't want him starting up a new business that directly competes right away, or taking his expertise to a competitor

[SeeGeeWhy]

We should probably just grab coffee and have a conversation about this because I could go on forever. Here are a few things to consider.

Number one is always motivation. Why are they selling? Ask them what they plan on doing after the deal closes. If they can’t give you a clear and detailed answer they are tire kicking and you are wasting your time. Do not deal with unmotivated sellers, ever.

Point 2 is you must be constantly building rapport & trust and determining what actually matters to them. Deals always come down to and hinge on the strangest things. Negotiation is 1000000% about gaining as much information as impartially as possible. It is your job to find the elements of the deal that are highly valued by them, that wouldn’t be such a big deal for you to provide. That’s where great deals get made. If you can structure a deal in a way that gives both sides what they want and balances risk appropriately, you will be able to close and finance it. I must reiterate here - MONEY ALWAY FINDS WELL STRUCTURED DEALS. Deal comes before money, period.

Next is the price/term balance. You can win on price, or you can win on terms, but not both. For example in your case it sort of sounds like you might have approached them as a strategic acquisition. If so be prepared to pay a premium, but you might be able to win some exceptional terms to help balance some of the risks others have pointed out so far in this thread. You’re always going to be dealing with imperfect information (as will the sellers) but you have to make decisions. Yooh’s example is a good one - including a significant holdback for a period of a year or so to cover the representations and warranties made by the seller as part of the purchase agreement would have protected then greatly.

That’s my high level generic advice. Hope it’s useful.

Where are you at in the process? Have you done this before? Are they working through an intermediary?

Don’t overthink valuation.
If the EBITDA is under 5 million you should expect the valuation to be somewhere between 3-5x the average free cash flow (or, roughly, normalized ebitda) for the past 3-5 years. If the sellers are outside of that range they better be able to justify it. You don’t pay for potential. If they want upside from growth they need to help make it real - performance based payouts on top of guaranteed amounts are excellent for this.

[Bend it like Bourgeois]

It’s been mentioned in passing but I’d look hard at not buying the company but instead the customer & software assets you’re interested in. Leave any skeletons in someone else’s closet - esp if there are a few employees you aren’t keeping.

[calf]

The downside of buying assets being if something or someone critical is missed, it can be hard to get after the fact. So a good purchase & sale agreement would have to have a representation that what's provided is complete.

Agree on the holdback..if you can't agree on that, you could also take out representation & warranty insurance.