I recently had the pleasure of appearing on the Think Like an Owner podcast. I talked with the show’s host, Alex Bridgeman, and Karen Spencer from Searchfunder, about my experience with acquisition entrepreneurship and the lessons I share in my book, Buy Then Build.
If you’re looking to buy or sell a business, the conversation I had with Alex and Karen contained a lot of nuggets that will improve your chances of success. Below are a few of my favorites.
For a variety of reasons, you won’t close every deal.
I’ve bought seven businesses, but there are plenty of others that eluded me for one reason or another. Sometimes you can’t come to terms with the seller. That happened to me when I was the only buyer for a tech startup. The deal made sense—I’d leverage their technology with my existing customer base—but we couldn’t come to terms on the future evaluation.
Other times I’ve simply been outbid. It’s memorable, and it stings, but it happens.
Then there are times when the acquisition is right, but the timing is wrong. Sometimes, the timing is actually wrong for the seller too, and they don’t end up selling.
Timing in investments can be everything.
Understand how the process works before selling or buying.
Buying an existing business versus investing in a startup are very different processes. You first need to look at the underlying reasons why startups are valued the way they are. What I’ve come to terms with is that startups are trying to raise money, and with that money, build an infrastructure that will generate revenue and allow the startup to become profitable.
To use simple terms, when startup founders pitch investors, it kind of goes like this: “I can build this company for $100, and if it works, it’s going to be valued at $1,000. I’m going to give you extra value by selling you equity for $100, go build it, and then later you’re going to get a huge percentage of that upside because you’re taking a risk on me.”
When you buy an existing business, you’re looking for a profitable infrastructure to begin with, then matching it with your entrepreneurial vision. There are a couple advantages to starting with an existing infrastructure. First, there’s a proven track record. Second, you have a private market that will dictate what the evaluation of that business looks like.
The first few times I tried to buy a business, I went directly to the seller, said I’d be interested in acquiring their company, and asked if they’d be open to it. Think about the dynamics in play here. Essentially, what I did was the equivalent of walking up to a house and telling the homeowner I’d like to make them an offer to move out. Of course they’ll listen.
Why? Because they think there is a buyer ready to pay over market value!
That speaks to another wrinkle in this process: the private capital markets are not widely understood. I am an M&A advisor, and so much of that involves educating sellers on the private market, how valuations work, and where their company may be valued. I give them a range, and the more we work together, the more we fine tune that range. Sellers have to mentally prepare themselves as they take their company to market, and that mental process can take months or even years as they get more comfortable with how things work.
So, as a buyer, when you approach a company that’s actively listed for sale, it’s a lot easier because that seller has already been through the learning curve. Both times when I approached someone who hadn’t been through that and I wanted to buy their company, they wanted 20 times EBITDA, without fail. They just didn’t understand how the process works.
I get it. The business is their baby and they value it highly. Entrepreneurs know how hard it is to build a company… but it’s not market value.
Don’t put too much weight into why the seller is selling.
With first-time buyers, the number one question is always, “Why is the seller selling?” Almost every buyer believes the seller knows certain death is right around the corner and they’re trying to unload the business before that death comes. Without a doubt, it’s important to know why the business owner is selling, but buyers give it too much weight. Here’s why: with a few exceptions, any answer you get won’t be the 100 percent transparent truth. Here are the exceptions:
- My spouse ran the business and they’ve passed away.
- I have cancer, and I have to sell to focus on my recovery.
- I’m getting older, and I want to retire to enjoy the rest of my life.
Anything else you’re told probably isn’t the honest answer. But that’s not because the seller is being dishonest! It’s because the answer is complicated and oftentimes very emotional. Maybe they’re burned out. Maybe they want to do something different. That’s common in today’s world. People aren’t graduating college and working at the same company for forty years before retiring. Nowadays, people want cycles in their lives, and entrepreneurs are no different.
Their decision usually has little to do with the economics of selling the business. Sometimes it’s shiny object syndrome. Entrepreneurs get bored and want to move on to something else. But there’s nothing wrong with wanting to exit after they’ve worked to start and grow the business–the entire Venture Capital and Private Equity industry has been based on this principle. However, very few sellers feel they can say that out loud.
So, don’t immediately think you’re getting scammed if one of the five D’s isn’t present: death, divorce, disability, disenchantment, or desperation. Whatever the answer, the truth is that they have something of value to sell and for whatever reason it’s time to take chips off the table. When you get down to it, it’s your responsibility as the buyer to identify the business risks and then get comfortable with those risks before you move forward. The seller isn’t going to be able to communicate all of that to you.
Deals can happen quickly if you work with a sense of urgency.
On two occasions, I have seen a business on Friday and been under LOI (letter of intent) by Monday. Now, it’s easy to look at those deals and not see the work that went into making them happen that quickly. Last month, I wrote about the reasons why 90 percent of acquisition entrepreneurs never close a deal, and one of the reasons was a lack of urgency.
The reason why I’ve been able to buy a number of companies, including two that quickly, is because I work with a sense of urgency. I’m trying to get it done. Whenever I hit a certain milestone, I ask myself, “What would need to be true in order for me to move forward?”
That paints for me so clearly exactly what I need to get answered so that I force myself to move to the next step. I think a lot of buyers lack that level of commitment. They don’t have a process, a sense of urgency, or a timeline. If you are committed to buying a company in six months, you can get it done. Now, you shouldn’t make a bad decision just to get it done in six months. But I do advocate setting an aggressive goal. If you close in nine months, for example, it’s probably because you were targeting six months. If you target twelve months, there’s no way you’re closing in nine months. You’ll keep delaying any kind of deal and may never close one.
Don’t keep the seller around too long after the closing.
One thing I’ve learned is that buyers tend to overestimate the importance of the seller after the closing. They want the seller close by for their knowledge and expertise, but the window of time in which the seller is helpful after closing is pretty small. Too many buyers keep the seller around for far too long, and honestly, it’s more problematic than it is helpful. As a buyer, it’s best to get the information you need from the seller as quickly as possible, then set the sun on them.
That sounds harsh, but here’s the truth: the seller doesn’t want to be there! You wouldn’t believe how quickly most sellers lose interest after the closing. The business has been their baby and they’ve built it, but the minute they sell it, their incentive for being there is gone. Even if you offer them a salary to stick around, they’re operating at half mast because their heart isn’t in it.
Their disinterest problematic, as is their old employees going to them for answers, which hinders your ability as the new owner to establish trust and authority with your employees. So here’s my advice: lock the seller in for a short amount of time, then get them out of there. That’s where they want to be and that’s where you need them to be for everyone to truly move forward.
As a seller, you want to truly exit after the closing.
On the seller side, there are a few ways you can expedite your exit and maximize the price for your business. One thing that helps is to identify the business risks that a buyer will be taking on and try to minimize those as much as possible. You also need to document your standard operating procedures (SOPs) so that your knowledge doesn’t leave when you leave.
Probably the biggest lesson I’ve learned when exiting is that the bigger the growth opportunity you leave on the table for a buyer, the more you can sell your business for. That’s why selling after you take the first step as a business can be a good idea. You’re able to show the buyer that they’ll have a good future because there’s something they can jump on immediately and grow. By taking that first step, you’ve opened the gates for them and given them proof.
A final piece of advice to sellers: when you sell, don’t stick around. The first exit I had, I ended up staying on board as an employee after the exit. I realized this, of all places, while I was getting a haircut. The stylist asked me what I did and I told her that I’d sold my business but was now working as an employee. She stopped, looked at me and said, “That never works.”
Turns out, that stylist was right: I lasted 32 days as an employee of that company after I sold it. Fact is, when you haven’t been an employee for a while, it’s hard to go back to being one.
The closing process is likely going to be a major drag.
I’ll just warn you right now: the closing process can be grueling, especially if you get an SBA loan. All closings are bureaucratic processes that require boxes to be checked for no practical reason other than for legality’s sake. Someone will come in at the 11th hour needing a signature from some form that hasn’t been filled out. And here’s the worst part: this will happen when you’re chomping at the bit to get going, yet you’re stuck twiddling your thumbs for three weeks waiting for the bank. While your mind is on business strategy, customers, product improvement, and marketing, the bank is worried that Form 52B isn’t filled out yet.
It’s a never-ending stack of paperwork and you’ll never be able to anticipate what the bank wants. Be patient. You’re almost to the finish line. Unless the deal falls apart, that is.
Speaking of which…
Without fail, every deal will start to fall apart at some point.
Every deal goes off the rails at one point or another. Most of the time it’s during the negotiation of the contract. Once lawyers come in and you get to that level of detail, it gets emotional for everybody. Understandably, as there’s a lot at stake, including people’s money.
So, just prepare yourself for the emotional roller coaster you’ll go through as the deal comes together and falls apart, probably more than once. In fact, if you talk to intermediaries, what you’ll find is if you’re going into closing and the deal hasn’t fallen apart yet, they’re nervous because they know it probably won’t close. Unfortunately, that’s not something I can show you in my book with an arrow that says, “Here’s where the deal will fall apart.”
I can tell you when I think it’ll happen, but nobody knows for sure. It’s the messy human part of this team sport we call acquiring a business. When it happens, my advice is too lean on the broker. I’ve tried to close deals without one and it never worked for me. You need that person in the middle who is truly incentivized to lead everyone to the common goal. There are times in negotiation and deal making where the only move is to step back from the table. That’s when you let the broker do their work to get everyone moving in the same direction again.
You’ll make mistakes. Always learn from them.
I made a small acquisition in the last decade where we simply didn’t gain the value we had expected. The biggest reason for that was a failure on my part to not integrate as effectively as I should have. The deal made sense, and I’d do it again. It was by no means a failure, but I learned from the error.
Looking back, it’s clear we didn’t have a written plan in place. Like negotiating a contract of any kind, for example, it’s not until you start to write things down that all players get clarification and truly get organized. We didn’t have a written integration plan and there were a lot of players. About thirty days after the closing, I realized that me, management, the seller, and everyone else involved in integration had different goals and assumptions on who was doing what.
Because we didn’t have a written plan prior to the closing, we failed to effectively capture the true upside of the acquisition’s potential. It was also too late to try and get consensus on most aspects at that point.
It was a great learning experience. Now every time I buy a business, I’ve got the next ninety days minimum planned out, including who’s doing what. I won’t make that mistake again.
Other acquisition entrepreneurs have made mistakes as well, typically underestimating a certain risk of the deal. Listen to their stories and learn from others.
For more advice on acquisition entrepreneurship, check out Six Months to CEO, an online course from Buy Then Build walking buyers through the search process with speed and clarity.