How To Successfully Buy Your Second Company
How To Successfully Buy Your Second Company
Plan Before the First Move
You built your business over more than a decade. You saw it through difficulties and, when the time was right, you sold it for a great price. Perhaps you even stayed on for a couple of years to facilitate the transition. But ultimately, you walked away, successful, financially secure and ready for the good life.
And then, if you’re like many executives in this situation, you discovered early retirement wasn’t as appealing as you’d thought. Within 12 months, you decided to get back into the fray. Of course, you want to take your time and choose the right situation.
So you start to look for a business to buy. You’re about to run into the first major surprise: It’s unlikely you can afford to purchase a company the size of your former one. While your business acumen certainly qualifies you to run a firm at least as big, you may now lack the capital to buy a company that large. After you paid the capital gains tax, you deployed the money wisely, creating a secure financial base for you and your family. Because you received $10 million pretax, it’s unlikely you’d want to devote more than $2 million to the next venture. Now you need additional capital sources.
Leverage Purchasing Power With Debt
The first option is to leverage your investment with debt. Although commercial banks actively participate in M&A, they must follow rigid guidelines (based on assets and cash flow) covering the amount of debt a company can carry. Your accomplishments and prior banking relationships are critical to your getting in the door. But rarely will a bank exceed its guidelines, no matter how good your previous performance.
In the event you can’t secure enough financing or require additional debt leverage, you can turn to junior or mezzanine lenders. They can provide extra cash — on top of your original loan. Finally, there’s seller financing. And in this uncertain economy, sellers commonly must accept terms such as receiving some payment over time.
Numerous factors affect each type of lender’s capacity to provide debt financing for a given deal, but it’s rare to get the deal done with less than 25% equity. Even if you can get the financing, beware of operating a company that is overburdened with debt. It leaves you a razor-thin margin for error, as evidenced by the recent demise of formerly heavy hitters buried under enormous debt loads.
Consider Outside Investors
Now comes a critical decision point for the returning entrepreneur. Perhaps you’ve heard negative comments about venture capitalists (VCs) and are leery about the issues brought on by outside capital, but additional investors may represent the only way to buy a company as large as — or larger than — the one you sold. Here are a few options.
A natural ally for a seasoned CEO may be private equity (PE) funds. Most PE funds enthusiastically welcome leaders with solid histories and the willingness to put their own money on the line. Good PEs will give you the operational autonomy required to run the company while providing you with board-level advice and support. Look for a fund that acquires appropriately sized businesses in your industry.
PE funds tend to deal with mature companies. Like VCs, they often invest other people’s money. But the investment percentage coming from PE professionals’ pockets is typically higher than a VC’s layout. PE deals may range from a few million dollars to billions.
PE investors usually use debt leverage to increase their return on investment (ROI). They will add debt to your combined equity capital to make the acquisition. Again, by aligning with them, you create the opportunity to own and operate a much larger business than otherwise possible.
Utilize Professional Expertise
There are benefits beyond additional capital when working with professional investors. First is price. PE professionals apply rigorous valuation methods to calculate price and will walk away rather than overpay. And they perform thorough due diligence to uncover any company issues that may affect future performance. Having completed many acquisitions, your carefully chosen investor partners will also have a strong working knowledge of M&A transactions’ complex terms and conditions.
Your enthusiasm no doubt powers your entrepreneurial drive. However, your zeal for a particular company, and what you believe you can do with it, can make the journey treacherous. Your investor partners will be thoroughly objective. The result? You’ll typically get the company for less, or, in some cases, avoid an acquisition with hidden pitfalls.
While your co-investors’ interests in making a fair, reasonable acquisition may parallel your own, be careful about how you slice up the pie. Will your investment be on the same terms as theirs? Will you get additional stock options for successful operational results? What are your compensation terms? What happens if major disagreements arise? These are just a few of the questions you and professional investors may face. It’s usually expedient to have an extremely knowledgeable M&A firm working for you on these issues.
Step Carefully Toward Your Goal
M&A professionals (investment bankers, business brokers or intermediaries) with experience in your industry, geography and business size can guide you through every step of the process. In addition to locating and screening target companies, they will know the PE groups in your area and can match you with compatible investment partners. Most important, as your agent, they can negotiate with investors to secure the right terms for you.
Many successful entrepreneurs who have built great companies have little or no experience making acquisitions. Aligning yourself with the right partners can make the second time around even more rewarding than the first.
How To Successfully Buy Your Second Company - To learn more about this author, visit David Barr's Website.
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An accomplished entrepreneur who has sold his or her first business often seeks to re-enter the business world by acquiring and operating another company. But the acquisition likely involves new partners and different strategies than those previously employed. Presuming you’re the purchaser in question, let’s examine one scenario.
Plan Before the First Move
You built your business over more than a decade. You saw it through difficulties and, when the time was right, you sold it for a great price. Perhaps you even stayed on for a couple of years to facilitate the transition. But ultimately, you walked away, successful, financially secure and ready for the good life.
And then, if you’re like many executives in this situation, you discovered early retirement wasn’t as appealing as you’d thought. Within 12 months, you decided to get back into the fray. Of course, you want to take your time and choose the right situation.
So you start to look for a business to buy. You’re about to run into the first major surprise: It’s unlikely you can afford to purchase a company the size of your former one. While your business acumen certainly qualifies you to run a firm at least as big, you may now lack the capital to buy a company that large. After you paid the capital gains tax, you deployed the money wisely, creating a secure financial base for you and your family. Because you received $10 million pretax, it’s unlikely you’d want to devote more than $2 million to the next venture. Now you need additional capital sources.
Leverage Purchasing Power With Debt
The first option is to leverage your investment with debt. Although commercial banks actively participate in M&A, they must follow rigid guidelines (based on assets and cash flow) covering the amount of debt a company can carry. Your accomplishments and prior banking relationships are critical to your getting in the door. But rarely will a bank exceed its guidelines, no matter how good your previous performance.
In the event you can’t secure enough financing or require additional debt leverage, you can turn to junior or mezzanine lenders. They can provide extra cash — on top of your original loan. Finally, there’s seller financing. And in this uncertain economy, sellers commonly must accept terms such as receiving some payment over time.
Numerous factors affect each type of lender’s capacity to provide debt financing for a given deal, but it’s rare to get the deal done with less than 25% equity. Even if you can get the financing, beware of operating a company that is overburdened with debt. It leaves you a razor-thin margin for error, as evidenced by the recent demise of formerly heavy hitters buried under enormous debt loads.
Consider Outside Investors
Now comes a critical decision point for the returning entrepreneur. Perhaps you’ve heard negative comments about venture capitalists (VCs) and are leery about the issues brought on by outside capital, but additional investors may represent the only way to buy a company as large as — or larger than — the one you sold. Here are a few options.
A natural ally for a seasoned CEO may be private equity (PE) funds. Most PE funds enthusiastically welcome leaders with solid histories and the willingness to put their own money on the line. Good PEs will give you the operational autonomy required to run the company while providing you with board-level advice and support. Look for a fund that acquires appropriately sized businesses in your industry.
PE funds tend to deal with mature companies. Like VCs, they often invest other people’s money. But the investment percentage coming from PE professionals’ pockets is typically higher than a VC’s layout. PE deals may range from a few million dollars to billions.
PE investors usually use debt leverage to increase their return on investment (ROI). They will add debt to your combined equity capital to make the acquisition. Again, by aligning with them, you create the opportunity to own and operate a much larger business than otherwise possible.
Utilize Professional Expertise
There are benefits beyond additional capital when working with professional investors. First is price. PE professionals apply rigorous valuation methods to calculate price and will walk away rather than overpay. And they perform thorough due diligence to uncover any company issues that may affect future performance. Having completed many acquisitions, your carefully chosen investor partners will also have a strong working knowledge of M&A transactions’ complex terms and conditions.
Your enthusiasm no doubt powers your entrepreneurial drive. However, your zeal for a particular company, and what you believe you can do with it, can make the journey treacherous. Your investor partners will be thoroughly objective. The result? You’ll typically get the company for less, or, in some cases, avoid an acquisition with hidden pitfalls.
While your co-investors’ interests in making a fair, reasonable acquisition may parallel your own, be careful about how you slice up the pie. Will your investment be on the same terms as theirs? Will you get additional stock options for successful operational results? What are your compensation terms? What happens if major disagreements arise? These are just a few of the questions you and professional investors may face. It’s usually expedient to have an extremely knowledgeable M&A firm working for you on these issues.
Step Carefully Toward Your Goal
M&A professionals (investment bankers, business brokers or intermediaries) with experience in your industry, geography and business size can guide you through every step of the process. In addition to locating and screening target companies, they will know the PE groups in your area and can match you with compatible investment partners. Most important, as your agent, they can negotiate with investors to secure the right terms for you.
Many successful entrepreneurs who have built great companies have little or no experience making acquisitions. Aligning yourself with the right partners can make the second time around even more rewarding than the first.
How To Successfully Buy Your Second Company - To learn more about this author, visit David Barr's Website.
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