Jan 13, 2012

Problems Equal Opportunities

This past week I looked at a manufacturing company for sale here in Arizona.  It has strong, consistent sales, good margins and cashflow.  It has employees that have been with the company for many years, with low turnover.  It's being offered at a fair and decent price.  It has strong market penetration and is the only player in this niche in town.

Yet, I chose not to put an offer on it.


After touring the facility and seeing the operation, I'm convinced there isn't a whole lot more I can do with this one to improve it.  Sales would likely remain flat, in spite of any marketing or sales efforts on my part.  There aren't any new technologies that could be introduced here to make things significantly more efficient from a costs/operations standpoint.  They've got a good team of people in place and they're paid fairly. 

Most of the businesses I check out have a lot of problems.  For me, problems equal opportunities.  And the bigger the problem, the bigger the opportunity.

My advice when buying a business:

Don't get stuck trying to preserve the status quo. 

Focus instead on creating new value.

Jan 12, 2012


Attended the Arizona Business Brokerage Association (AZBBA) as a welcomed guest of Michael Abbinante this morning.  He's sold more businesses in Arizona the past few years than anyone - he tells it how it is and is one of the better brokers I've worked with.  Amazing how many people I've come to know over the years.  I probably have done business with more than half the members there, many of whom I'd never actually met face to face until today.  Great group of people.  For those looking to buy a company, attending one of these meetings as a guest might not be a bad idea...

Met with a friend for lunch who I know through Toastmasters.  With his background in M&A, consulting, and capital raising, I'm intrigued that he wants me to partner up with him in creating a new private equity / venture capital / incubator - consulting firm on a partnership basis.  He's invested a lot of time and money into the project already.  I've always respected and admired him and would welcome the opportunity to work along side him.  Still in brainstorming for now, but certainly intriguing.

Met with our Realtor this afternoon to discuss selling some of our properties.  Joan Kilby is not only a great friend, she's probably the most experienced, passionate, well-educated and loyal real estate agent I know.  We're pretty much upside down on all our real estate at this point, and our holding costs compared to the inevitable hit to our credit, should we choose to short-sale the properties seems to be a no-brainer.  On the other hand, I'm a big believer in sticking to the contract we signed - our word is our bond - and I detest the idea of not living up to what I agreed to on the loan.  After a lengthy discussion and getting caught up on life, Joan talked us out of listing the properties since we intend on purchasing more real estate this year. 

Brae is calling me to dinner.

Jan 11, 2012

2 Tips for Structuring the Deal in an LBO

Two of the most common questions I get from potential buyers looking to buy their first business is:

1) What should I offer?

2) How should I structure the deal?

There are several books that will give you multiples and, while useful as a guide, the structure of the deal depends upon a few things. A couple of books I've read and found authoritative and helpful in the valuation process:

Tom West's "Business Reference Guide"

Stephen Bethel's "Business Valuation Rules of Thumb & Formula Resource Guide"

However, as useful as the reference guides listed above are, they don't dive into how best to structure the deal.  Most of the businesses I buy I try to structure with an LBO (leveraged buyout) mindset, which really is the best approach when trying to protect your downside.  This approach won't work well for service-based businesses or businesses with few or difficult-to-quantify assets.

Here's a general guide for buying a business and you want to protect your downside (hint: you should always protect your downside).
1) Look to the balance sheet for your downpayment.  

Additionally, be prepared to discount the assets to create a floor.  Anything below this number, the seller is better off simply liquidating himself.  In most small-business situations, you don't want to put down more than the assets of the business are worth at face value.

For example, a small manufacturing business I helped someone evaluate today has $650K in equipment and about $100K in inventory in the asset column.  Not sure how they figured its worth at $650K, but let's assume I can buy most of the major equipment units off ebay or through a liquidator for $350K.  The $350K would be my floor.  Assuming I could buy the equipment new for $500K, the $500K would be my ceiling.  So my downpayment is going to be between $350-$500K.  We'll say $400K as an example.

2) Look at the income statement for the debt service.

The company we looked at today is doing $1.2M in sales and is throwing off a steady $200K per year in positive cashflow.  $200K is the most it can afford to pay in debt service.  Of course, the business will also be required to support a new owner-manager's salary - say $40K/year for the first year.  And we have a minimum ROI on our capital invested, of say 25%, or $100K per year.  That leaves us with a cap of $60K per year in 'leftover' cashflow available for servicing debt.

We could offer the Seller a note for $300K at 6% for 6 years and that would bring our annual debt service to about $60K/year.

Total offer price: $400K down + $300K note = $700K.

Their asking price?


So there's a gap there.

Either the Seller will bend and accept the offer as it's going out, or the Buyer will need to come up a bit more on an earnout basis.

In any event, the point here is that you need to know what a business can realistically support from an income/debt standpoint, and what the business is worth from a balance-sheet/downpayment standpoint.

Jan 10, 2012

2012 Resolution: Educate People on How to Successfully Buy, Fix and Sell a Business

For too long now I've used this blog as a place to store random thoughts and ideas. I've used it to share a bit of my philosophies on life. Enjoyable as this may be for me, it's not much use for anyone who might be looking to do what I do. That is, buying, fixing and selling companies. Because I've received more inquiries the last several months from people wanting me to evaluate specific business opportunities they're considering, I believe this would be a great platform for addressing questions and specific deals. I promise to maintain propriety. I can certainly appreciate the need to keep specifics of a deal confidential. However, unless otherwise requested, I will be sharing enough information on the deal to help others, while of course, eliminating confidential specifics such as the location of the target. My hope is that we can learn together. If there's a business you're considering purchasing, or you're in a distressed situation, or you're just trying to sell your company, feel free to email me with your questions and I'll do my best to get back in touch with you within 48 hours. No promises though, okay?