Want to grow by acquisition but do not know where to start? Is one of your goals to become an entrepreneur and you need some guidance on how to buy your first company?
Buying a business is simple but not easy.
Here is an 8-step plan for a successful strategic acquisition or purchase of your first business:
- How much would you want to exit for? The answer to this question will inform (1) what your profit needs to be in order to exit, (2) how much profit (the size of business) you need to acquire, and (3) how long your exit plan will take. Would selling your new acquisition now meet your exit goals? Does the business have the capacity to grow to meet your exit goals?
- What is your exit plan? Begin with the end in mind. How much cash do you want to exit the business with? Then, divide that number by two. This is a starting point to understand what your business profit needs to be in order to hit your exit valuation goal.
When you have built cash flow that will support your exit goal, should you hold onto your company and have a general manager run it? Or, will you sell the company outright? Alternatively, could you partner with a private equity firm or family office that will do a recapitalization, leverage your talent to acquire more clients, and give you a “second bite of the apple.”
There are a lot of options when it comes to preparing to exit from the beginning of an acquisition. Most business owners do not take the time to speak with their wealth manager, CPA, and business broker as they plan. However, if you plan your exit from the beginning, you will be ahead of the game when it comes to profiting from years of hard work in business ownership.
- What is your acquisition plan? When you begin acquiring companies, are you going to build a platform for private equity companies to buy, or will you consider yourself the platform and buy companies to “roll-up”? Are you going to buy your competitors, or your supply chain?
- How will you find companies to purchase? Finding off-market companies for sale is not easy. Although you can find businesses for sale online, the best deals are actively sought out through a sourcing strategy. The masters at sourcing use direct mail, telemarketing, social media, trade journals, ads, and more to find companies who are open to a conversation about selling. This work can be a full-time job. Many acquirers leverage their CFO, accountant, attorney, or business broker to find companies to purchase.
- What industry do you want to make acquisitions in? When it comes to industry, get as granular as you can. This will help with your search. For example, a well targeted search will not just include “manufacturing companies.” A better result includes a search “ball bearing manufacturers.” Instead of “professional services” companies, search for digital marketing firms. The more specific your search the better. Stick to companies in your current industry or that are industry adjacent. Find firms that have technology or talent that would be helpful to growth. Buy competitors who have customers you want.
- What geography is best to acquire in? Consider where the best customers and talent supply are. Travel distance to manage a company is also a consideration.
- How will you pay for the acquisition? Cash or leverage are the best strategies to pay for a company. Your initial investment should pay for itself within 24-36 months. The company profits should be able to support paying you, the bank note, reinvestment back into the company, and distribute profits.
Remember, you can leverage bank loans to purchase a business for 10-20% down. Private investors can also be a great source of cash, and investors do not require the hoops needed to get a bank loan.
- Do you have the capacity to make an acquisition? Time is a limited commodity. To acquire a business, you have to find the companies to purchase, submit letters of intent, execute due diligence, navigate the loan process, negotiate asset purchase agreements, and then transition the new company into yours. The entire process takes 4-6 months and can be a full-time job.
Acquiring companies is a simple, but not easy, process. Start with a plan that is clear, concise, and easy to follow. If you plan around the prior 8-steps, you will be ahead of the game, and will execute an acquisition strategy like the pros.
Jamar Cobb-Dennard is a business broker and M&A attorney. To learn more about how to buy or sell a business, contact Jamar at jamar@jamarcobbdennard.com.
