buying a business
perfect
by Randy Myers
In the fall of 2005, a business broker came to buys a roofing contractor, for example, or the adver-
Bob Lanier Enterprises with an unexpected but tising agency that takes on a PR firm.
intriguing idea: Why not buy a crosstown com- Done properly, Venema says, acquisitions can
fit
petitor whose owners want to sell out? help companies execute a business strategy more
The proposal had undeniable logic. Lanier quickly and with less risk than they could by going it
Enterprises, founded by former NBA great Bob alone. Ken Stein, managing director of Kensington
Lanier, is a marketing company focused on pro- Company & Affiliates in Roslyn Heights, New York,
viding clients with promotional products featur- agrees. “It’s very expensive to grow organically,” he
ing their company logo. Kustomizeit, a competitor, says. “Many businesses today are facing price re-
had a market niche built around its expertise in sistance at the same time that their expenses are
With one stroke of the pen, a small business can buy another business—and grow by leaps and bounds
coordinating online incentive promotions for sales increasing. Yet smart business owners know they
staff, a capability that Lanier was interested in ac- need to be able to grow to sustain themselves.”
quiring. Kustomizeit also had a completely differ- A sensible and smooth acquisition within the same
ent customer base than Lanier’s, which meant the industry or a complementary industry, says Venema,
combined companies wouldn’t cannibalize each can provide a business with the top-line revenue
other’s business. Finally, recalls Lanier vice president growth it needs. It can also reduce expenses. When
Mike Price, “they had some experienced personnel Lanier acquired Kustomizeit, it trimmed the latter’s
we were interested in bringing on board, including costs by moving its office personnel out of a leased
seven salespeople, who can be tough to find.” building and into available space at Lanier.
In March 2006, Lanier closed on the deal, in-
creasing its annual revenues by about 38% with
the stroke of a pen. Since then, Price says, results Think Before Buying
have been gratifying. Not only does Lanier now To be sure, buying a business is not a risk-free prop-
have access to new customers and new technology osition. Companies that attempt to merge with an-
but sales for each member of the Kustomizeit other face a host of challenges, from melding differ-
sales team have also risen. ing cultures to combining accounting systems—and
Small businesses buy each other all the time opportunities for missteps abound. Venema urges
spring-summer
for all sorts of reasons. Some, like Lanier, are buyers to learn as much as they can about how their
looking to obtain new technology, new products, target company operates before making a buyout
new customers or experienced personnel. Others, offer. If time and circumstances permit, he says, a
says attorney William Venema, head of the busi- buyer should consider partnering with the com-
07
ness law section in the Dallas office of Epstein pany he wants to buy on a specific project, or even
Becker Green Wickliff & Hall, a national law firm, retaining it as a subcontractor, in order to assess 15
are seeking to balance unattractive aspects of their its strengths and weaknesses. Otherwise, the buyer
business vision
business, such as seasonality, by purchasing an- should solicit feedback from the company’s vendors
other company with complementary character- and customers for insight into how it runs its busi-
istics. There’s often a natural synergy between ness. Ultimately, the buyer will need information
acquirer and acquired: the siding contractor that only the target company can provide, such as its
photo credit tk photograph by laurence dutton/getty images
buying a business
financial records. But that comes later, when negotiations have begun in
earnest and the suitor has signed a confidentiality agreement.
All Together Now
In the meantime, Venema says, the buyer should also de-
velop a comprehensive description of its goals following
the purchase and a complete plan for achieving them.
That means figuring out details such as where new
employees will work and how the accounting and in-
formation systems of the acquired company will be
integrated. If employees of the acquired company are
worried about their job security, which is common,
the buyer must make plans to address these concerns.
After the Lanier deal closed, Price met individually with
leaders of Kustomizeit’s sales team to assure them that
they would have a brighter future after the acquisition.
Finally, Stein advises business owners to be patient
with the deal. “A smart acquirer will watch and learn and
do things slowly,” he says, “and will also be sure to keep good
customer, employee and vendor relations.”
Hard work? Sure. Still, buying another company remains one of
the only ways for a small business owner to boost revenue by 25%,
50% or even 100% in one stroke of the pen. g
6 Tips for Buying a Business business brokers and mergers-and-
acquisitions advisors offer these tips for small business owners considering acquiring another company
1 Let someone approach your
acquisition target. Hiring a business
broker to represent you demonstrates com-
prescribed rule of thumb to value a com-
pany can be a mistake. Attorney William
Venema believes that valuation is an art that
For others, the purchase agreement should
detail how long and in what capacity the
owner will remain. Some buyers sign the
07
mitment and guarantees your anonymity requires experience and common sense. seller to a long-term employment contract.
spring-summer
early in the negotiations.
2 Assemble a team of advisors. “When
somebody’s selling the company
4 Sign a letter of intent before drafting
definitive purchase documents.
A nonbinding letter of intent outlining
6 Take advantage of attractive
financing options. KeyBank can
help buyers arrange loans* guaranteed in
they’ve built, it becomes an emotional issue the major aspects of the transaction is an part by the U.S. Small Business Administra-
16 that’s about more than dollars and cents,” important first step and a way to be sure tion under Section 7(a) of the Small Business
Lanier’s Mike Price says. “A broker can help the owner really wants to sell. Act. These loans are generally accessible
business vision
both sides work through that.” to companies with annual revenues less
3 Don’t rely on rules of thumb to
establish a purchase price. Using a
5 Spell out the former owner’s role
post-acquisition. Former owners may
not need to stick around long after the sale.
than $25 million and feature more favorable
terms than conventional loans.
*Subject to credit approval.
photograph by don farrell/getty images