Apr 13, 2011

The Ideal Company Acquisition

A bit of Q&A from an associate of mine.  His questions, my answers on what type of acquisition we should be targeting - my thoughts on the ideal company acquisition for where we're at at this time.

As for my ideas on an ideal acquisition, I've commented below.

This may seem a bit vague, but I've bought companies in industries I haven't been too fond of, with the justification that if I can buy a dollar's worth of value for 25 cents, it's worth the trouble.

I'm trying to get away from this philosophy.

I've had a tendency to buy, as Warren Buffet would describe, cigar butts - good for one last smoke, but not worth much long term.

This tendency to buy companies on the cheap, based simply on the estimated cash-on-cash ROI and what I believe I can resell for a short-time later, probably aren't the best set of criteria for making a business purchase.

So far, I've been lucky I suppose in holding to this type of 'anyting-goes-so-long-as-the-price-is-right" mind set, which has served well in negotiations with sellers as well as buyers and helped me remain emotionally neutral to an opportunity. Perhaps it opens up more opportunities than otherwise would be if I were ultra-selective... but I believe I've got a lot to learn in this area.

My selection process has been primarily one of elimination: I've avoided and plan to avoid any/all strictly service-type businesses - especially those that don't offer some type of barrier to entry (real estate intensive; restaurants; retail (unless e-commerce); dying industries or industries that appear to be threatened by any macro trends (publishing, hospitality, etc.); I have steered clear of any technology companies that I don't understand or that rely heavily on patents.

I prefer companies that have some type of identifiable competitive advantage/barrier to entry that can be exploited or developed. I know this is all very vague, so I'll try to answer your questions in more detail below.

Q: Agree to what our business skill sets are – to leverage
A: I believe my skill sets would center on leadership, initiative, vision, creative problem solving, critical reasoning, logistics, negotiation & sales/marketing, fiscal discipline, and a healthy appetite for taking educated risks.

Q: Market niches: you like – don’t like
A: Like:  Niches that can expand into other markets by applying a similiarly proven base formula
Don't like: too narrow of niches that tend to dead-end or don't have other outlets for growth, or that rely upon an asset that isn't scalable.

Q: Markets: domestic and/or international
A: Preference: domestic with potential to grow international, unless of course it's an e-commerce company.

Q: Markets: population demographics influence (organic growth)
A: Preference: ride the following macro-trends: baby-boomer (health care, entertainment, etc.), green tech/ resource efficiency;

Q: Travel: OK to have to travel – or prefer not traveling
A: Okay traveling for due diligence after an offering has been accepted. Intention to bring company to Arizona if and wherever feasible.

Q: Types of businesses – Manufacturers/ Services/ Software/ e commerce
A: Comfortable with all, though I've never bought/managed a software company yet and would need some help on that one. Would prefer to avoid the 3 R's: real-estate or location-based companies, retail, resturants, etc.

Q: Size: $ to invest/ $ annual revenues/ Employees
A: I should have $500K liquid in the next 6 months as I'm in the process of selling one of our companies and several pieces of real estate.  I would prefer we buy a company with Revenues over $1M, preferably $2-Million, EBITDA of $500K or more, with strong gross margins (over 25%). Employees can be 0-100 or more, I'm comfortable leading large groups, but I would hope the revenue per employee would exceed $100K.

Q: Geographic Location options
A: I prefer being able to meet face-to-face with the people I work with whenever possible. Tempe, Arizona would be the ideal place to bring a company if at all possible for me, from wherever in the U.S. Other options would simply depend upon the economics of a given company and where it would make the most sense for it to be.

Q: Infrastructure support requirements: facility/ equipment/ storage/ tools/ computers etc/ repair
A: I'm open on this one assuming the facility is in or around the Phoenix area where we can see it. Big facility or no facility at all is fine.

Q: Liability exposure and ongoing legal advise support requirements
A: I don't like liability exposure, as much as the next person I suppose, and would try to avoid companies where there's a lot of liability or potential liability (don't ask me why I was looking at the solar company). :)

Ongoing legal support is another one I would hope to avoid by sticking to companies not needing or relying too much on patents or proprietary technology.

Q: Financability – SBA or other to get the deal done or leveraged
A: SBA is fine I suppose, but I prefer equity investors over debt, unless its seller carryback debt. The only things I like to leverage or use the bank for is A/R's or FF&E and I prefer a working capital line for the A/R's, a Seller note for the FF&E.

Q: Degree of technology – simple to proprietary
A: Prefer simple. Having said that, if I felt more comfortable valuing and knowing how innovation trends might impact the value of a patent or a technology, I would be more likely to want to invest in something more complex; I rarely feel comfortable with what I think I know.

Q: Business Scalability
A: I'd prefer a business that can scale and handle additional growth.

Q: Government influence and compliances
A: As much as is possible, I generally prefer companies that are relatively free of governmental regulation, except in situations where the government is making great efforts to build-up a particular industry poised for growth (ex: solar or anything green).

Q: Expansion potential and cost thereof
A: Almost a must to have expansion potential that can be developed for fifty cents on the dollar - there has to be profitable, organic growth potential in the deal for me to be interested.

Q: Reasonable Sales cycle: 5 minutes or 5 months to purchase?
A: Pretty open here, but prefer the shorter sales cycles - 6 months or less being ideal.

Q: Customer purchase loyalty tendencies
A: Prefer some type of consumer monopoly or oligopoly based upon loyalty/brand that keeps them coming back. Prefer dealing with clients (re-occurring revenue streams) over customers (one-time buyers).

Q: Required Selling Process: Face to face/ E Marketing/ Website/ CEO level decisions?
A: Comfortable with all. Prefer the human element of phone-sales over face-to-face if possible, and if the sales process can be simplified for the benefit of the customer by an e-commerce solution, I prefer that even more.

Q: Competition?
A: Prefer a few (1-3) competitors in a given market so I can size them up, compare and offer a better solution. Industries that have too many competitors (where our company isn't in a top 3 or 4 position) make it difficult to size them up and it becomes a bidding war of who can do it for less. Niches that appear to have no competition as a result of some new, break-through product aren't my ideal either; I'd rather copy and use what works with others than blaze a new trail.

Q: Develop an original business concept or improve an existing - other company’s business model?
A: I prefer to improve rather than invent from scratch. Having said that, if I was convinced we had a blue-ocean strategy in place (a completely revolutionary business model for a new or old industry) that utilizes the strengths and minimizes the weaknesses of a given industry (or blending of 2 or more industries or sectors), I would be more inclined to develop it from the ground up.

Q: Dependency after purchase of existing personnel to maintain/ grow the company
A: I'm a bit different than most on this one. I prefer a company I can eventually insert a team chosen by myself, rather than keeping long term the existing personnel (typical of most financial or LBO buyers) or simply collapsing layers and taking over positions in a typical synergy-merger/acquisition (typical of most strategic buyers). For that reason, I prefer not to be heavily dependant upon the existing personnel of the company. (Having said that, I try to be very sensitive to the value of the company in relation to key personnel - a top salesperson for example - and if it does rely too much on too much brainpower or too few of key people; in such cases, I tend to be less inclined to want to buy). I prefer to eventually inject the company with people who hold a similar value system as myself: integrity, discipline, work, family, religious, etc., rather than being talent-dependant.

Q: Who will be the potential buyers after the purchase is made?
A: I have yet to sell a company to anyone other than a layed-off executive or another small business owner, so I'm probably not as familiar with the options that are out there with a larger company, but would like to sell eventually to a PEG or some other institutional investor perhaps... Preferably the business would be somewhat relocatable, in that it would open itself up to more views when we put it on the market. I like the idea of relocating a company from an overly taxed, overly regulated, overly paid state like California and planting it in Arizona, for example. I'd prefer we buy a company with a minimum $500K EBITDA. From my limited experience, buying right, or for the right price, has been one of the biggest factors in being able to sell for a great price (relative to the purchase) later on.

Q: The search for businesses to buy: RE-active or PRO-active?
A: PRO-active for sure. I'd prefer to hunt them down, rather than calling on listings. Occasionally, however I come across some businesses that show up on the market that I prefer to jump on if the value appears to be there for a needy seller, and it isn't in one of the industries I dislike.

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