perfect fit
buying a business
by Randy Myers
In the fall of 2005, a business broker came to Bob Lanier Enterprises with an unexpected but intriguing idea: Why not buy a crosstown competitor whose owners want to sell out? The proposal had undeniable logic. Lanier Enterprises, founded by former NBA great Bob Lanier, is a marketing company focused on providing clients with promotional products featuring their company logo. Kustomizeit, a competitor, had a market niche built around its expertise in
buys a roofing contractor, for example, or the advertising agency that takes on a PR firm. Done properly, Venema says, acquisitions can help companies execute a business strategy more quickly and with less risk than they could by going it alone. Ken Stein, managing director of Kensington Company & Affiliates in Roslyn Heights, New York, agrees. “It’s very expensive to grow organically,” he says. “Many businesses today are facing price resistance 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 staff, a capability that Lanier was interested in acquiring. Kustomizeit also had a completely different customer base than Lanier’s, which meant the combined companies wouldn’t cannibalize each other’s business. Finally, recalls Lanier vice president Mike Price, “they had some experienced personnel we were interested in bringing on board, including seven salespeople, who can be tough to find.” In March 2006, Lanier closed on the deal, increasing its annual revenues by about 38% with the stroke of a pen. Since then, Price says, results have been gratifying. Not only does Lanier now have access to new customers and new technology but sales for each member of the Kustomizeit sales team have also risen. Small businesses buy each other all the time for all sorts of reasons. Some, like Lanier, are looking to obtain new technology, new products, new customers or experienced personnel. Others, says attorney William Venema, head of the business law section in the Dallas office of Epstein Becker Green Wickliff & Hall, a national law firm, are seeking to balance unattractive aspects of their business, such as seasonality, by purchasing another company with complementary characteristics. There’s often a natural synergy between acquirer and acquired: the siding contractor that increasing. Yet smart business owners know they need to be able to grow to sustain themselves.” A sensible and smooth acquisition within the same industry or a complementary industry, says Venema, can provide a business with the top-line revenue growth it needs. It can also reduce expenses. When Lanier acquired Kustomizeit, it trimmed the latter’s costs by moving its office personnel out of a leased building and into available space at Lanier.
Think Before Buying
To be sure, buying a business is not a risk-free proposition. Companies that attempt to merge with another face a host of challenges, from melding differing cultures to combining accounting systems—and opportunities for missteps abound. Venema urges buyers to learn as much as they can about how their target company operates before making a buyout offer. If time and circumstances permit, he says, a buyer should consider partnering with the company he wants to buy on a specific project, or even retaining it as a subcontractor, in order to assess its strengths and weaknesses. Otherwise, the buyer should solicit feedback from the company’s vendors and customers for insight into how it runs its business. Ultimately, the buyer will need information only the target company can provide, such as its
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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 develop 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 information 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.
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6 Tips for Buying a Business
business brokers and mergers-andacquisitions advisors offer these tips for small business owners considering acquiring another company
prescribed rule of thumb to value a company can be a mistake. Attorney William Venema believes that valuation is an art that requires experience and common sense. For others, the purchase agreement should detail how long and in what capacity the owner will remain. Some buyers sign the seller to a long-term employment contract.
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Let someone approach your acquisition target. Hiring a business broker to represent you demonstrates commitment and guarantees your anonymity early in the negotiations.
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Assemble a team of advisors. “When somebody’s selling the company they’ve built, it becomes an emotional issue that’s about more than dollars and cents,” Lanier’s Mike Price says. “A broker can help both sides work through that.” Don’t rely on rules of thumb to establish a purchase price. Using a
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Sign a letter of intent before drafting definitive purchase documents. A nonbinding letter of intent outlining the major aspects of the transaction is an important first step and a way to be sure the owner really wants to sell. Spell out the former owner’s role post-acquisition. Former owners may not need to stick around long after the sale.
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Take advantage of attractive financing options. KeyBank can help buyers arrange loans* guaranteed in part by the U.S. Small Business Administration under Section 7(a) of the Small Business Act. These loans are generally accessible to companies with annual revenues less than $25 million and feature more favorable terms than conventional loans.
*Subject to credit approval.
photograph by don farrell/getty images