Buying Businesses
Article Date: Sep 14 2006
If you want to build a business quickly then you need to consider acquiring businesses as well as building your own organically. In fact, when I was building a public company I looked for a 50/50 split between the two.
Organic growth demonstrates the competitiveness of your offer and acquisitions are important if you are seeking to gain economies of scale quickly – particularly in a consolidating market.
Over the years I’ve bought nearly 70 businesses and, even though I reckon that my success rate has been around 80 per cent, that still means that I’ve screwed up 15 deals. And in truth, another ten have been only so-so performers.
Deal junkies fail fast
It’s definitely easy to do bad deals. Why? Because excitement of the acquisition chase can alter your business brain and slowly turn you into a deal junkie. Think about it – it’s a quiet week so you go off to sniff out some buying opportunities instead of worrying about your staff and clients. The next stage, as this drug takes hold, is that you buy businesses to paper over the shortfalls in your existing companies – rather than ensuring there is not a problem in the first place.
I made this mistake in the UK for two-to-three years in the 90s, thus I speak as a reformed addict!
So, although one could write a book entirely on this subject of acquiring businesses, I’m limiting myself to some tips without any attempt to be comprehensive.
1. Build your reputation
These days you are likely to have competition for the target company. So, why should the owners sell to you? You certainly don’t want it to be because your company is famous for paying the highest prices.
This is why a good reputation is invaluable. I reckon that at Tempus, where we bought more than 40 businesses in less than ten years, we consistently saved five per cent of the potential price because of the reputation and vision we offered. That is, of course, only relevant if the management are the key shareholders and/or they want to see their employees in good hands.
2. Build your assets
Cash and a track record are your prize assets for deals. When a small private company buys another private company, the guy with the cash and the experience is always king. The partners of most private companies extract all the profits from their company each year, so when you approach them you should have more cash than them and, normally, a lot more borrowing power, particularly if you have a good, progressive track record financially.
Another asset is going to be your external support team – the accountants and lawyers who are going to work with you on the deals.
Now, a lot of owners of growing businesses would rather watch paint dry than spend time with these professionals, but you will need to invest the time identifying the right people.
This isn’t only down to price and chemistry – or even experience. The ones I look for are the really commercial ones; the lawyer who says, late at night during the final stages of your deal, ‘They’re arguing about 18 points in the contract. If I were you, I would concede on these 15 but really dig in on these three which are the only significant ones.’ They’ve identified the deal-breakers and this can save you a considerable amount of time and money and stress.
What you don’t want is the smart lawyer, who wants to demonstrate – particularly to the lawyers on the other side – how incredibly smart he or she is. While they’re looking pleased with themselves, showing how many angels you can fit on a pinhead, they’re burning through your money and souring the deal.
3. Identify acquisition targets
You can get a company to do this for you, but if possible I prefer to do it myself. I think you can miss a lot. It’s like always getting someone else to talk to your customers.
If you’re serious about acquisitions you need to seek out and get to know the best companies, the ones that meet your acquisition criteria.
The ease with which you can do this will depend on the industry you’re in. You can certainly get opinions from suppliers; you can natter to trade press journalists; you may come across competitors via bids you’ve both made for the same contract; you read the relevant trade press, their website, their annual report, press releases, and so on.
Serving on trade bodies and industry committees may seem a waste of time too, but it’s an opportunity to build relationships – away from the competitive cut and thrust.
I’ve never been shy about ringing anyone up and inviting them to lunch, or breakfast. Owners of businesses are often lonely and they enjoy a mutual exchange of issues in their industry (and I don’t mean price-fixing agreements!).
The international expansion of my old business, CIA, into 29 countries was initially based on my checking the league tables of companies in each country – identifying the largest independent ones; getting a second opinion from clients and media owners (ie, suppliers) where relevant. Then I’d get on a plane and go and meet them. I can’t recall that anyone refused me: I suppose they were intrigued.
And the amazing difference is that once you go overseas, somehow these target companies are much more willing to open up to you – it’s as if you can’t be a competitor in the same way. Obviously you can’t abuse this and expect to keep your reputation or integrity, but it sure does enable you to have a perspective on a market in double-quick time.
4. Courtship
Never forget that you may be buying their business, but you are also selling yourself at the same time. Back to the opening point: why should they sell to you if there’s competition? And if there isn’t competition, should you be worried?
So, this is a courtship ritual. You want them to desire you so that they open up and tell you plenty about themselves and their company, their ambitions, hopes and fears. Then you can decide if you want them. Sometimes when I’m doing this, I think, ‘Ingram, you’re a bit of an old tart!’, but it has worked incredibly well over the years.
5. Negotiation of heads
It’s absolutely true that a Heads of Agreement letter is not a real contract, but just about everyone makes an emotional commitment before they sign one. It’s the whole basis of the deal, summarised in no more than two pages – the formula, the price, the percentages and the contractual arrangements for the key people staying. So it is important.
In fact, never go to the next stage without it – you’ll usually waste a lot of money (great for your advisers, but rotten for you). Although to be fair, with lawyers and accountants you can usually negotiate a useful discount if the deal goes wrong.
However, don’t fall into the trap of regarding the Heads of Agreement with such reverence that you try to turn it into a contract. I once made that mistake, creating a long, drawn-out process of what should have been a simple exercise. This really upset the vendors who thought we were obsessed with nitty gritty and not the big picture. We lost the deal.
6. Due diligence
There are two sorts of due diligence: financial/commercial and professional. You need to make sure you really know how the company makes its money.
And don’t forget to manage the outcome at this stage. Expect a bumpy ride and warn the owners in advance that’s how it’s likely to be. Remember, it’s their baby and you’re apparently questioning every little thing about it. Moreover, it might sound trivial, but your tone of voice is very important to minimise the aggravation.
And the two most important words during due-diligence – ‘normalised’ and ‘sustainable’
