There are no “rules of thumb” in the pursuit of companies to
buy. Each purchase opportunity has to stand on its own merits.
There are, however, attributes of acquisition candidates that
need to be defined for what they really are before additional,
limited resources are put at risk in a potential deal. It is
absolutely critical for any proactive business buyer to
understand, consider and deal with specific business
characteristics that add unnecessary financial risk to the
investment opportunity at hand.
The purpose of this article is to highlight characteristics of
acquisition candidates that you should consider absolute “deal
killers”. These are brought to your attention because it is
very common and natural to get so far down the due diligence
trail on a company you have worked so hard to find, that IS
for sale, that is right in your industry “comfort zone” and
not see the inevitable financial disaster looming down the
road because you became “blind” to what the future business
potential will be, versus the potential of what you think it
could be!
Buying Quality Businesses is a “Number’s Game”
There is a direct relationship between perceived value of
something that is in very limited supply and the time and
effort you have invested to find it. Quality businesses, with
extraordinary growth potential, that are for sale, are like
the proverbial “Diamond in the rough” or “Needle in the
haystack” analogies … it takes removal of tons of dirt and
mounds of hay to find what you seek!
In any proactive business acquisition pursuit, a seasoned
business buyer will tell you that finding viable companies
that can be purchased for reasonable terms is a “number’s
game”. Thousands of company candidates, that lead to hundreds
of contacts, which lead to ten’s of acquisition conversations,
that hopefully lead to one company purchase!
Going into any business acquisition effort, knowing what it
takes to find and eventually secure a business purchase deal
has a dramatic affect on the definition and your eventual
allegiance to your business purchase criteria. If your
purchase criteria are too “tight” and your commitment too
rigid to that criteria, you may quickly feel you’ll never find
your “ideal” company to buy!
Absolutely, Unquestionably, No Brainer, “Deal Killers”
Attempting to find and qualify businesses to buy is an
iterative and complex process. Each opportunity eventually
stands on its own merits and purchase compromises will prevail
because it is unrealistic to think you will find the exact,
“perfect” acquisition opportunity. There are, however,
business attributes, like these listed below, that are best
left with the current company owners:
The sellers have previously terminated two or more purchase
contracts
The current business owners have no clear, compelling
reason to sell
The sellers cannot provide basic financial information
The business is completely dependent on one key employee
The seller will not provide any form of “earn-out” based on
future company performance
The business relies on limited natural resources to produce
its product or service
Improper application of the company’s product/ service =
major $ liability
The company has not been profitable for the last 3 years
Pending significant legislation possibly impairs future
growth
Key personnel will not sign employment contracts or non-
compete’s
Payment on acquisition debt exceeds 50% of after-tax
profits
There is an insufficient pool of labor or talent to grow
the business
There is no technical or knowledge barrier to entry for the
targeted business niche
Key patents are about to expire
Only one supplier can provide a key product/ service
ingredient
One customer equals greater than 20% of total annual sales
revenues
A viable competitor offers ALL the products and services
your customers need
There is no customer purchase loyalty
The overall demographics of your targeted market(s) are
negative
Extraordinary product/ service warranties are firmly
established within the industry
The product must be manufactured overseas to effectively
compete
Targeted, primary markets have had no growth the last three
years
There is existing or pending, noteworthy legal encumbrances
against the company
You determine the current business owner lies to you about
“small” details
Assuming you have clearly defined and documented your critical
Business purchase criteria well in advance to starting your
business acquisition program, you will often start to
compromise your purchase criteria as you continue to invest
more time and money to find your “ideal” acquisition
candidate. This is a “cardinal sin” in merger and acquisition
pursuits. Compromising your purchase criteria is natural
tendency, but ultimately a fatal mistake!
The importance of defining, understanding and truly committing
to your critical company attributes is most important during
these frustrating times. The most effective business buyers
are disciplined business buyers. They are those who can
decisively deal with uncovered negative company attributes and
immediately move on to the next purchase opportunity.
About the Author:
Mark Smock is President of
,
the FIRST international business buyer directory of its kind.
Business Buyer Directory provides a non-traditional means for
proactive business buyers to locate businesses for sale
worldwide that meet their exact registered purchase criteria.
