There are currently hundreds of St. Louis area executives in search of a business to buy. Many will spend significant time and significant money in a business search effort, but will eventually fail. Douglas Group, a merger and acquisition firm based in St. Louis, comments on some key obstacles to success in the search to buy a business.
Our firm sells closely held businesses. Currently, we have on file the names of over 600 displaced or discontent executives in St. Louis who think they want to buy a closely held business. However, only about one in 30 of that number will ever actually succeed in the effort to buy.
Why is it so hard? What makes the odds against successful location and purchase of a business so great? There are probably a hundred possible answers to these questions - but we want to share with you the Big 3 we see as most common, and offer suggestions on how to better your chances for success. In a nutshell, the most common obstacles are:
--Unrealistic risk expectations
--Poor search techniques
--Indecisiveness/lack of speed
Start with the basic motive for purchasing a business. Many of the would-be buyers we talk with are looking for a business to purchase as a possible alternative to taking another job. They’ve thought about buying or starting a business for years, and finally, they think maybe the timing is right. They are out of a job, or have become very frustrated with their job, and they feel that maybe it’s fate tapping them on the back to say, “It’s time you started working for yourself for a change!”
There’s nothing in the world wrong with that sentiment. Surely it’s the Great American Dream at its core - to work hard/to produce value/to prosper!
However, would-be buyers all too often forget some of the rules of basic economics.
1. Unrealistic risk expectations.
Taking on ownership is not the same as taking on a job. Ownership entails risk. Ownership requires capital investment. Most buyers tell themselves they are ready (or perhaps it’s more, “I may be ready”) when they aren’t. If you know enough to have a viable shot at running a fairly well-established and substantial company, you probably have the expertise because of responsible jobs you’ve held with past employers. You probably earned a substantial salary. You probably own a nice home and have a moderately sizeable personal savings. Now - are you ready to risk what you’ve accumulated to date, to open the door to the possibilities of ownership? Many prospective buyers aren’t, but don’t face that fact until after they’ve spent substantial time and money on the “chase."
SOLUTION - Search your soul before you begin. What are you willing to risk? If a personal guarantee and a second mortgage on the house are not acceptable, your chances for success are slim. Look for a new job instead.
2. Poor search techniques.
Shopping for a business is costly. It usually takes multiple attempts - some of which go to the extent of attorney fees, accountants and advisory fees, etc., before the buyer actually gets far enough along to be even a real contender. Most would-be buyers crash and burn within a year of life-without-salary. They exhaust their risk tolerance (and their funds) before even coming close to an opportunity to take the real risk of ownership.
Four out of every five individual buyers who call us have extremely wide search parameters. They say they are looking for something in light manufacturing or distribution, with sales of $5 million to $25 million, is profitable, and is based in St. Louis. They will usually looks at dozens of businesses which they don't have the expertise to handle.
SOLUTION - To improve the odds for success, narrow the search. Focus on a specific type of company to acquire. Learn everything about the one niche, make sure everyone in that business comes to know you, and “shop till you drop."
3. Indecisiveness/lack of speed.
The average individual buyer is slow. Industry buyers (existing companies) and seasoned investment buyers are faster in their decision-making, more credible to sellers, and have money ready to move to tie up a good seller. Individual buyers are all too often afraid to make a commitment. While they check out financing and analyze every tiny aspect of the business two and three times, the shrewd competitor or the savvy investment buyer strides in and plunks money onto the table, to win the exclusive right to proceed.
SOLUTION - Know your financing limitations before you begin (knowing your industry helps). When you find the “one”, move with intensity and sincerity to closure. Get to the “stop-shop” (agreement that seller will only deal with you) as soon as possible. Then don’t let up - take it to closure as rapidly as possible.
Deborah Douglas is Managing Director of the Douglas Group, a St. Louis-based private investment banking firm. For more information on sale or purchase of companies, call 314-991-5150 or email her at ddouglas@douglasgroup.net.
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