Acquisitions: The Art of Buying Well

A wide range of business executives have entered or have considered entering the acquisition markets in recent years. Their numbers include business owners who need to grow to meet competitive pressures, corporate executives who get the “assignment” to find and acquire, and individuals seeking an opportunity to do their own thing.

In spite of the growing numbers in the market, only a small percentage succeed in buying and buying well. Buying well means never having to say you’re sorry. The object of the game is to look back on the acquisition 3-5 years later, with the ability to think, “Thank goodness we made that move”.

A good bit of the trick to successful buying is in the finding. There are far more happy results from paying a little too much for the perfectly suited company, than for achieving a bargain acquisition of the wrong company. The first step, and perhaps the most important step, is in planning the acquisition search. Determine what you want, what you need, and what fits with your skill sets and your position in the marketplace.

The ideal acquisition candidate capitalizes on the strengths of the buyer, by adding something that was missing to the buyer’s business mix. Corporate buyers often tend to respect and view as valuable that which they themselves already do very well. Although natural and quite human, such perspective may miss the optimum opportunity. Sellers who are weak in the area which you can most easily supplement may become much stronger very quickly, when you patch the trouble spot. Synergy is finding the 1+1=3 combination.

Assuming you have done a fine job of strategically targeting that ideal fit, you then have only to find the company, convince owners that you’re an honest and earnest buyer, agree on reasonable pricing and terms, and get them to the altar. All formidable tasks, but ever so much more worth the time, cost, and effort if the targeting was well done.

Finding the optimum buyer requires more than getting your name out to a handful of professional contacts and friends. To optimize opportunity you must develop systems for identifying, screening, and courting prospective buyers. It’s a time consuming process, and one which requires knowledge of research techniques, business assessment and valuation skills, and communication talents worthy of the entrepreneurial tigers you are likely to meet and greet. Thus, it’s not often a set of tasks successfully delegated to a junior level staff member.

Consider hiring professional help. If you can’t, at least be realistic in assigning and supporting the search effort. Allow time, provide legal and financial support, and expect to meet with a number of failures before you get to success. If your targeting was wise, the net effort will be worth the cost.

A few tips on the process?

Approach prospective sellers with respect and courtesy, and guard the confidentiality of even the earliest conversations with great care. The fastest way to lose credibility with a prospect is to be casual or sloppy with the trust they’ve shown you by sharing confidences. Every staff member or associate privy to the discussions should be equally respectful of the seller’s interest in confidentiality. Mistakes here will surely cost you the opportunity, and could even result in a lawsuit.

Probe pricing expectations early. The cost of visits and extensive analysis can be extensive. If the seller is naïve about value, and truly believes his company is worth an overwhelmingly silly price, it’s best to learn that as early as possible, and stop wasting time and effort. Reciprocate his willingness to share open price discussions with your own counter-assessment, especially if it seems there’s no likely compromise within range. Give him time to think. If you must agree to disagree, back off graciously and sorrowfully, giving your reasons for your own value model. If you’re forthright and courteous, he may call you in the future, after he re-tests his own assumptions.

When you seem likely to come to agreement on price, move as quickly as possible to a letter of intent, with a “no shop” requirement, whereby the seller promises to discontinue discussions with alternative buyers. Your final negotiations are far more likely to work easily and to your benefit if the seller doesn’t have competitive alternative buyers whispering in his ear.

All of this said, it’s only fair to acknowledge the flip-side of the negotiating equation. Our firm represents sellers routinely. When we do, we won’t give pricing expectations. Like most professional investment bankers, we seek proposals, and we make the buyers set the price. We also resist letters of intent, until all of the important terms and conditions have been ironed out, and the buyer is willing to put his money where his mouth is, with a substantial deposit. As a buyer, you will probably deal with professional seller representatives occasionally. When you do, you probably can expect to have competition, and you probably will pay a strong fair market value for the acquisition. At the same time, however, that seller will probably not back out at the last moment, and the process itself is likely to be far smoother and more efficient. Not a terrible tradeoff for the right purchase opportunity.

Regardless of the reason for your acquisition desires, or your position as you search, the acquisition business is one with great dangers and great rewards. The best of the best will do it well, and will look back with a smile in years to come.

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.