Dr. John Psarouthakis, Executive Editor, www.BusinessThinker.com. Founder and former CEO, JP Industries, Inc, a Fortune 500 industrial corporation. Adjunct professor, Strategy and Acquisitions, Ross School of Management, University of Michigan
This is the second of short articles of my thoughts about Acquisition of a business
Here we review very briefly the primary ways in which you learn about businesses for sale. An elaborate but informal network of brokers are the best direct source of businesses for sale. Although you may be lucky and find your own company by making direct contacts, you are likely to get a much broader lead pool generated with less effort by building your broker network.
The first “filters” for your leads are the initial criteria that you set in your acquisition plan. Although you will have many more issues to review as information unfolds, it is unpractical to consider much more than the total sales revenues, degree of profitability, and industry, at the start, because this is all the information you are likely to get from most brokers or other sources before having to sign a confidentiality agreement.
Once you sign a confidentiality agreement, you are wise to set up more detailed criteria. Some of the more common criteria used at this next stage include the location, product line, the reputation of the company, if easily determined, growth patterns for the industry and the company up for sale, more detail about profitability, cash flow and liquidity, and of course, the overall appeal of the business to you, personally.
The fee agreement is usually also required at about the same time as the confidentiality agreement when you are dealing with a buyer broker. The broker wants to be assured that he or she will get a commission if the sale goes through. This is not needed in a case where the broker represents the seller, as in the case of the investment banker. However, in the latter situation, once you have signed a confidentiality agreement and received extensive written material, you will be asked, within a few weeks, typically, to send a letter of interest, indicating the range of value that you place on the company. Only a handful of prospective buyers are then allowed to continue considering the company for purchase, including an initial company visit and subsequent due diligence.
It is not unusual to sign a confidentiality agreement for approximately fifty companies for every company you actually buy. Of course, this does not happen all at once.
Once you sign a confidentiality agreement and receive additional information, you can probably eliminate all but a few from further evaluation. Or in the case of the investment banker, some of these may be eliminated for you. For the remaining few, you are ready to proceed to the initial site visit and preliminary due diligence.