Great companies are often made better by great acquisitions. If you’ve been salivating over the competitor down the street, you may be in luck. In today’s economy, businesses are looking to sell and it can be a good time for those in the market.
Before biting the bullet, consider these five questions.
1. What are their numbers?
Beyond looking at the base earnings of your target company, consider digging deeper into financial records.
“A lot of sellers like to tout their great earnings from four of five years ago, but they don’t talk about their latest numbers. The economy has changed and it is important to look at numbers from the last few months and weeks to get a feel for the real health of the business,” says Brad Neave, co-owner and vice president of business development for Sign Solutions of Tampa Bay, a custom sign company in Tampa, Florida.
2. Will customers cross over?
Loyalty is a major factor in the success of a small business. If you’re thinking about acquiring a longstanding company, legacy customers may be skeptical when you take over.
Lessen concerns by reaching out to new customers on a personal level, suggests Neave. Invite them to your facility for an open house and spend time getting to know them.
“Remember that you will never keep a customer based on price—especially a small business customer—if you show them great customer service, it will give you a fighting chance of keeping them,” he adds.
3. Will the acquisition help your existing client base?
It can be pretty tempting to acquire a company that you think will add to your bottom line. But before moving forward, make sure the deal will also add value to your current customer—not confuse or frustrate them into walking away from your business.
“I remember a nearby sign business that acquired an embroidery business thinking that they were similar—customers got confused, and eventually the company went into bankruptcy,” says Neave.
Not sure if the deal will be of interest to your customers? Try surveying them with general questions to help gauge interest and tolerance of a possible deal.
4. Do you have the capacity to continue a strong revenue stream?
Look at the business that you want to acquire. Does it cost a fortune to continue manufacturing its product? If so, consider a lower valuation of the company. Even if you manufacture the same thing, you will soon be tasked with putting out similar levels, and more work equals more money expended.
“Buy profits, not revenues—understand the cost of making the revenue happen,” advises Arun Prakash, vice president of Virgo Capital, an Austin, Texas-based private equity firm specializing in software and technology-enabled service companies.
5. Why is the other company willing to sell?
According to Prakash, there are only a few legitimate reasons to sell a good business.
He says, “If the owner is sick, retiring, or getting a divorce, it is understandable—but outside of that, you need to know exactly why they want to sell because you don’t want any surprises down the road.”