Having trouble buying a business? Try buying 260 within 10 years!

Frequently I interact with prospective business buyers who report that they are having trouble finding appropriate businesses to acquire and when they do find ones they like they can’t get a deal done.  A few prospective buyers I know claim to have been aggressively looking for 2-3 years during which time they haven’t bought even one business.  There’s no doubt that finding and buying a business can be a difficult process.  However, there are some business buyers who manage to find and successfully buy multiple businesses within a short time frame.  In the July/August issue of Inc. Magazine, there is an article worth reading titled “How I Did It:  Richard Heckmann“.  The subtitle reads “Buy Fearlessly, Sell Ruthlessly; Repeat Regularly.”  Richard Heckmann was the largest shareholder and CEO of U.S. Filter in the 1990s.  The business was a struggling company with $7 million in sales, until he pursued an aggressive acquisition strategy, completing 260 acquisition, after which he sold the business for $8 billion in 1999.  He then went on to do 26 acquisitions to expand sporting-goods maker, K2, after which he sold that business for $1.2 billion in 2007.

I’ve never met Richard, and I don’t know what his acquisition criteria and strategy are.  However, I do have some suggestions for those who want to acquire a business, but may not be having success:

• Utilize a system / method of analyzing businesses.  While every business is unique, I find that most small business acquirers don’t seem to follow any consistent process for analyzing a business.  In the future, I will be writing a series of articles or a book on a suggested methodology for analyzing a business and determining whether or not it may be a good acquisition.
• Be comfortable with paying an appropriate price and terms.  Many business buyers seem to be looking for a business that appears to have a low price and significant seller financing terms.  While everyone likes to get a good deal, sometimes the best deal is to pay a good price for a great business, rather than paying a low price with seller financing for a mediocre business.
• Develop a positive relationship of trust with the broker and seller.  Some buyers seem to think that an effective negotiation strategy for buying a business is to berate the business, feign disinterest, and employ aggressive negotiation tactics.  In the acquisition of a small business where the seller is the founder of the business, this usually backfires.  Remember, that the seller often has a lot of ego tied into the business.  Usually a better approach is to build a positive relationship of trust with the seller.  Many sellers would rather be flexible on price and terms with a buyer they really like and think would be a good match for the business, than someone they feel is disrespectful, arrogant, and trying to nickel and dime them.  If there are pricing or deal term issues, a buyer will usually do better if they continue to express all of the things they like about the business, but objectively point out why the risk/reward relationship isn’t consistent with their expectations, while suggesting changes to pricing and terms that would make them comfortable and why.
• Utilize CPAs and attorneys correctly.  Sometimes business buyers expect that their CPA or Attorney’s role should be to tell them whether or not they should buy the business.  If that’s a buyer’s expectation then they will probably hear “no” on most businesses they are looking at, including those that may be excellent acquisition opportunities.  I would suggest that a better use of advisors is to ask them to help understand the financial performance of the business better and to identify risk factors.  The business buyer should make their own decisions about whether the business is an appropriate acquisition based on their preferences, criteria, and risk tolerance.
• Don’t expect perfection / have realistic expectations.  Some business buyers remind me of the guy in his early 20s who is looking to date a woman who has super-model looks, is ivy league educated, has a high-power career, comes from tremendous wealth, enjoys sports, likes action films instead of the ballet, is laid back, family focused, a great cook, very domestic, likes doing housework, caters her schedule to his, is faithful, and has great values.  Such a woman may exist, but good luck finding her!  No business is perfect or will likely meet every acquisition criteria.  Businesses are always in a state of flux and will always have challenges and areas that can be improved.  A buyer who shuns businesses that have any challenges or problems will likely be forever looking for a business to buy, but never finding one.
• Be decisive.  After marketing a business for about a month last year, a buyer, we’ll call him John, expressed serious interest.  John, asked all of the right questions, and spent significant time analyzing the business, its operations, its market, and its financial performance.  He liked the business, but wasn’t ready to make an offer.  There were no additional questions asked after that, John was simply trying to decide whether to make an offer based on his evaluation of the business.  About a month later he made an offer: coincidentally on the same day that another offer was received.  The seller ended up going with the other offer.  Had John been more decisive, he would have likely succeeded in buying the business.  The delay in submitting an offer, accomplished nothing – no additional information was gained during that time, but what it did do was allow enough time for a competitor to submit an attractive offer.
• Submit an offer.  Suppose you are looking at a business and the asking price is $3.2 million, yet after doing a careful evaluation of the business you find that you are not comfortable paying more than $2.5 million.  The broker has said that the price is very firm.  The only way to really test whether that is true or not is to submit a Letter of Intent.  Putting an offer in writing with as many of the anticipated terms outlined as possible is the best way to determine if there is any common ground that can be found.