* Targeting. Once you know the kind of company you want, identify all those businesses in the location you'd like. Look in the phone book. Call the owners and ask them, point-blank, if they're interested in selling. On average, 3 of every 10 such cold calls attract some interest. The owner says, "Yeah, maybe. Let's talk."
Often the best business to buy is one the owner has never considered selling. For one thing, it probably has fewer problems. For another, by being the one to introduce the idea, you get the inside track. Chasing this sort of deal may take longer. But your hit rate will be higher, and without competing buyers you'll end up getting a better price.
Phillip Harris drew a circle around Boston, where he wanted to live, and used the federal government's standard industrial classification (SIC) code system to narrow his search. He went to Dun & Bradstreet Information Services, which refines and tailors SIC data for a price, and said he wanted a list of all companies in certain SIC codes, by location and size.
Some 250 Boston-area prospects fit his profile. He liked 20 of them, made offers on 10, and ultimately purchased QuadTech, a $12-million maker of test and measurement instruments in Bolton, Mass.
A successful search requires hard, painstaking work. "You can't do this casually," Helfinstein says. "You have to plan it, make it a job, and go about it in a businesslike, systematic way. Get an office. Keep careful notes of every contact."
* * *
9. Choose the right seller.
The big question is, Why is the seller selling?
Sometimes it's obvious. Pravda describes the perfect seller as a 75-year-old whose children have no interest in the business, who has no idea what the business is worth, who never wears a jacket and tie to work. "I want to walk in there and get him to tell me about his business, take me to lunch, bring me home to meet his wife. This isn't his business, this is his baby. He created it. And I want him to look at me and say, 'I want you to own my business.' Because once you've made this connection, money is no longer the most important thing to him. He's not going to sell his baby for a better price to some jerk from Wall Street. You are already part of his family -- he's adopted you."
But what if the seller is 45 and in good health and has no clear reason to sell? It is critical to determine the veracity of his or her explanation. Is the seller trying to unload a dog? Is there pending litigation? Is the market collapsing? Apply the smell test. If something doesn't square, back off.
It's not imperative that you like the seller personally, but it is important that you trust him or her. In many cases, you might want the seller to remain for six months or so to introduce you to suppliers and key customers. Also, if the former owner stays for a while, employees will have a sense of security and continuity.
Remember, too, that in almost all cases the seller will "carry paper" to help you finance the deal -- an arrangement that will make the two of you quasi partners until the debt is retired. That's another reason to be sure your relationship is built on trust, not just on contracts, which can be hard to enforce.
* * *
10. Do research before setting the initial price.
The process of doing research to determine an initial price, and getting the seller to agree to it, will help ensure that the seller has cleared whatever emotional hurdles exist and will indeed sell the company.
You'll need to make a "book" on the company. Spend a day or two there, poking around and meeting with management. Ask about market share, sales trends, and growth potential. Get tax returns, balance sheets, and if possible, at least five years' worth of audited financial statements. Obviously, you must pledge to keep that data confidential.
Expect to see some shabby record keeping. "Entrepreneurial businesses are often run sloppily because the owners have everything in their heads," says David Jensen, a management professor at Bucknell University. "They want to save money, so they don't pay for formal audits. They may just have an accountant do a limited review."
Another caution: the owners of a privately held company often use it as a personal checking account. The business pays for everything from their cars to their country club. The goal is to suppress earnings and minimize taxes. When it comes time to sell, of course, they want to show cash bulging out of every nook and cranny. In cases like that, you might have to reconstruct the cash flow. Accountants can help.
* * *
11. Make sure your letter of intent is specific.
Writing a detailed letter up front can save you a lot of time and money later. It's smart to involve a lawyer experienced in acquisitions. According to Susan Pravda, the document should set out such terms as deadlines for signing the letter and, later, completing a purchase-and-sale agreement; payment terms; an escape clause that rests on due-diligence findings; a management-equity plan; a definition of what -- stock or assets -- is being sold; confidentiality for the seller; and exclusivity for the buyer.
The matter of management equity is often ignored, but Pravda says it's common in smart deals to set aside 10% to 20% of the stock for managers. Sellers who care for their key people want to do well by them, and buyers want to keep key people on the team.
The question of whether the sale involves stock or assets is even more important, but Pravda finds that a third of buyers and sellers never discuss it. "Maybe they don't know the difference," she says. "If I'm the seller, it's easy. I always want to sell the stock, because I only pay tax as a stockholder, and I get rid of everything -- all my assets but also all my liabilities.
