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Tip 4 / 5 Tips to consider when you’re planning to grow by acquisition

Tip 4 – Approach sellers with a win – win perspective. The initial approach you make to a business is vital, especially if you’re making it on a proactive basis. It really sets the scene for the future discussions. Come on like a shark circling its prey and you’re likely not to get past first base … read more   

Purchasers will likely be instantly defensive, and give a prompt “no”, or be fed “the anything is on the market, if the price is right” line.   

In my experience the deals that work best are those where the purchaser and the seller both want the deal to happen, and they can work together, perhaps with the use of a third party, to make it happen. So it follows that your dealings with the vendor have to instil trust and confidence.

 Of course not all discussions are made with a buyer making the initial contact, often the contact is made by a third party, engaged by the purchaser. It also works the other way, where an agent represents the vendor, and advertises the business or makes direct approaches to potential purchasers. 

In all circumstances however there is a need to find some common ground with the focus being on setting up a deal that will work for all parties, a win-win.  

So it helps in the first instance that both parties just get together to work out if there could be a basis for a deal. In the initial meeting / discussion both parties should go in with open ears and seek to understand what’s important to the other party. Seek to understand what they want to achieve. It’s certainly not the time for purchasers to start negotiating down the price by trying to shoot holes in the vendor’s business. Comments like “the machinery is not worth anything in today’s environment” don’t engender too much trust.  

The vendor needs to be on side, and his confidence / trust needs to be won. Keeping the deal confidential is an obvious topic to be discussed in the initial meeting. Usually there needs to be a confidentiality agreement in place before discussions get too in depth. This is something that vendors need to be confident that the purchasers respect. 

A purchaser sharing information about their business can help build that confidence – with some forethought they may even develop a summary of their business to leave behind, perhaps including some confidential information about their business. This is even more important where the purchaser is initiating discussions. 

From a purchaser’s perspective it’s really important is seek to understand what the drivers are for the vendor – what do they really want? If it is a sale, do they want the business to keep trading under their companies name, do they want most of their staff to transferred, do they have issues with the lease, issues with equity in equipment? Do they need to continue to work?

Maybe there are alternative ways to structure the deal that may work better for both parties. Open and frank discussions obviously help build trust.

As the above will suggest, it’s not all about the final price, and this is where purchasers frequently focus too much attention on. It’s just as much about the terms of the deal, that are suitable to both parties. Price is important, but I’d say it is better to pay a little too much if it ensures that the vendor is on side and wants to work with you to make sure the transition is smooth, and that his business to move on and flourishes within the new entity.  

Selling a business is often an emotional process. Some liken it to losing a baby that’s been nurtured and developed over a long period of time. So the purchaser needs to display a little empathy and understanding of what is likely to be a massive change in the vendor’s life. Often they have had the business for decades. It’s what they do and change is something that is often difficult to accept. In all businesses I’ve sold there is always an emotional tie.

The initial meeting sets it all up, if the parties get on, and can see the benefits of working towards discussing a deal, and want to both work towards a win-win, then there is far better chance of the deal being done, and being successful. 

That’s the topic of next week’s tip, the need for developing a good implementation plan, because without it success is by no means guaranteed.

Alternatively, you can engage a third-party to approach possible vendors and this can take some of the sting out of the initial approach.

I’ve seen deals fall over because the purchaser has talked down the client list, talked down the machinery prices, talked down the business in an effort to negotiate down the price. 

The first thing you need to consider is whether you are an opportunistic buyer – one that is ready once an opportunity presents itself, or if you want to be a proactive buyer, the one that initiates the contact.

An opportunistic buyer needs to let it be known that they are in the market to make an acquisition. There are a variety of ways to do this, which course you set to follow is really dictated by how confidential you want to make your interest. 

Some of the ways you could let the market know are:

•    Notify brokers in the industry of what you are looking for (not all businesses are listed on their web sites), and they may have had discussions with potential vendors

•    Notify your networks and contacts, such as paper suppliers, machinery suppliers, industry associations etc.

Of course you can just sit by and watch the trade journals and broker’s sites, or wait for someone to knock on your door, but really if you adopt this approach you’re probably not that serious about making it happen. 

 A more proactive way of getting to potential vendors is to start by doing your our own research, or to engage someone to do the research on your behalf. Some sources of information, apart from those listed above, are

•    Industry data bases

•    Business lists – i.e. if you’re looking to purchase a designer, then lists can be purchased with contact names, addresses, number of employees etc.

•    Google / Yellow Pages

•    Internal sources

The proactive approach can also include advertising your interest in trade journals, perhaps direct mailing know suspected targets, or even via a direct approach, such as a phone call, to potential vendors

It could also include you engaging someone to act on your behalf. External assistance obviously come at a cost, but may bring with them a wealth of experience in business transactions. You could of course have the skills internally to do the research, initial contact, transaction structure, negotiation and post deal integration. If you have not done an acquisition before, it makes sense to look at getting external assistance or at least researching how it is best done. 

The famous military quote that “time spent in reconnaissance is time rarely wasted” certainly holds true in the search for acquisition targets. The more background information you have on them the better. This could include but is not limited to, how many employees they have, the age of the proprietor, their equipment, their management, niches etc.

The approach you, or your external person makes, to potential vendors is of course is very important. In my experience it’s best not to pick up the phone and ask if they are for sale, as the answer will be invariably “no”, or  “everything is available for a price”.

“The approach“ is the subject of tip #4 next week.  

 Ascent Partners offers business appraisals, and the subsequent development of options as industry consultants.  Contact Richard Rasmussen on 0402 021 101, or visit our web site at www.ascentpartners.com.au