Some will justifiably tell you that it is a buyer’s market when you acquire a business. Sellers can wait a long time for the right deal to come along, and the law of supply and demand will tell you the rest. This means that business buyers can name their price, right? Well, in fact, it doesn’t.
Bear in mind that the number of profitable and growing businesses constitute only a small proportion of the full number of privately-owned companies in the UK. Some of the best businesses never even go onto the open market and require a direct acquisition approach in order to be bought.
Furthermore, some sellers will simply prefer not to sell at all than lower their price expectations, often set by business brokers. Therefore, if you are looking for a financially secure going concern with healthy margins, then there is only one option – you will have to fork out more than you would like to.
Let’s examine the key issues in this area in greater depth.
In the majority of cases, entrepreneurs and business owners looking for expansion want to acquire healthy enterprises. Two factors are key to this. The first is sustainable profitability which is not down to just one or two good years or customers. The second is that the business should not be too owner dependent. It needs to continue to operate efficiently after the business purchase.
Businesses with a history of generating profit will reflect this success in their company valuation. If you only want to acquire assets from a business purchase, then opt for a less profitable going concern.
However if like most buyers, you want to see a regular profitable return, then your offer must reflect this. Likewise, if you see an opportunity to acquire a business where the owner will not have to stay on to support the transition period, then the seller’s price expectations will need to account for this. If your offer falls short of expectations, then expect the seller to walk away.
Absolute bargains do come about once in a while. Nevertheless, you should see it as the exception rather than the rule. If you want a cheaply priced business, then you are going to have to accept that there will be some commercial flaws.
Businesses will always be available without a large price tag but there will always be some caveat or other. Maybe a premises lease is coming to an end or an important customer has just ended their contract, for example.
In other situations, you might find out that the business is servicing a large debt or has large sales invoices that remain outstanding which may need to be written off.
Then again, low profitability for the sector might be a factor. Or perhaps some key managers will be lost post-sale meaning you’ll lose a lot of expertise? In companies where there are many supplier and customer relationships reliant on the existing owner, you may also see this reflected in terms of lower price expectations.
Operational businesses that face hurdles like these and can still be grown into something better with good leadership. However, this will always require more dedication from the buyer. Reasonable sellers understand this, so do offer their businesses for sale at lower prices but not if they lack these flaws.
Businesses that are attractive for acquisition, the ones that are not owner dependent and which have a strong management team in place, will cost more. In addition, you can expect a premium to be attached to other factors. For example companies with a clear path toward future growth with sound business plans that are already in operation.
Some other factors that many buyers will be on the lookout for include businesses that don’t require extra investments in order to upgrade machinery, IT equipment or premises. In short, the most attractive firms that buyers are seeking will provide a healthy dividend at the end of the first year of ownership for only a small amount of work. Because such businesses are healthy, they are more sought-after and you can even face rival bids for them.
As attractive businesses are in demand, and owners know it, you will need to offer them a fair price. This should be an attractive multiple of the adjusted EBITDA or you simply won’t get their attention. Think of it this way: their thought process will be to consider that they can achieve a better price by just continuing to work on growing the business for a few more years. Patience always trumps any pressure tactics.
Once you have accepted that you’ll need to pay for what you want to buy, the next step is to establish how you might find these potentially attractive businesses. On its own, this can be a difficult proposition. This is where the instruction of an acquisition advisor comes in.
It is true to say that marketing of extremely attractive businesses does take place. However, to find the true gems you need to be searching off-market as well as on. Professional advisors are having the right sorts of conversations with business owners directly every day, allowing would-be buyers an advantage.
To sum up, if you’re looking to acquire the finished article – a business which won’t need much attention but that still provides a good return – then you’ll need to hunt it down. You’ll also need to pay a fair price for it. However, if you want to acquire a business for a cut-price, then you will have to compromise on its overall condition.
If you’ve realised that you need assistance with your acquisition search, speak to the independent experts. We help our clients find, contact, analyse and negotiate the best possible terms for their acquisition targets. If you want a free consultation then call us now on 01962 609 000.
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