As brilliant tech startups continue to flood the market, 2018 has been a record-breaking year for tech mergers and acquisitions. Inc. senior writer, Christine Lagorio-Chafkin, cites a number of fascinating 2018 startup acquisitions in this recent article. Amazon paid more than $1 billion to acquire Ring in February. Recruit Holdings, a Japanese conglomerate that owns job-search site Indeed.com, made a deal to buy Glassdoor for $1.2 billion in May.
While these mega-acquisitions are what we see in the press, I've worked with quite a few micro business owners as they acquire competitors or businesses that complement their model. Yes, even business owners with only a few (or no) employees can execute a rapid growth strategy via acquisition.
Is your bank account too small to consider acquisition?
Chad Byers, Managing Partner at Symmetrical Investments, LLC., a firm specializing in mergers and acquisitions, says perhaps not. "If you can put ten to 20 percent down, have a reasonable credit score, and know what your skill set is as it applies to the business, money is readily available." Transactions under 500,000 dollars may qualify for the SBA's popular 7(a) program. "If you have a sound business purpose in mind and your business is considered small within your particular industry, this is something to consider," says Byers. This type of SBA loan doesn't need to be fully collateralized, and loans under 25,000 dollars don't require any collateral.
So why don't more small business owners consider such a purchase? I believe the option doesn't occur to many lifestyle business owners.
"I'd never even thought about purchasing another company," says CEO and founder of Vitruvian Advertising, Kristie McDonald. "When the opportunity presented itself, I knew it could be a great way to grow my company's revenue and expand into new markets, and it has."
Wendy Pease, President of Rapport International, LLC, a foreign language translation company, made her first purchase of a small business to become an entrepreneur. She wanted to run a company but didn't have any ideas about what kind of business to start. "I began looking for a business to buy after a fortuitous conversation at a venture capital conference where someone suggested buying a company as a good way to become a business owner," says Pease. "By taking out a home equity loan and buying the language translation services company, Rapport International, we've grown from just me to a staff of six."
Great opportunities exist right now.
As Baby Boomers continue to retire at the rate of 10,000 per day, tremendous opportunities to scoop up small businesses exist in the U.S. That presented the opportunity for a second acquisition for Pease to expand. "By taking out an SBA loan, I acquired a company that specializes in in-person interpreting in Nebraska. The prior owner wanted to retire, so it offered us the opportunity to expand to a new geography and increase our service offerings."
Is acquisition the best way to expand geographically?
If you are considering a new territory, as Pease did, executing your plan via acquisition may be a smart way to go. "Why not do the same thing or something comparable in a contiguous territory to expand your footprint?" asks Byers. "It's already been established, has a good brand, and everyone knows who they are. Now you can sell your services into a channel that's already been developed."
SBA loans aren't your only option.
"Traditional bank and SBA loans are one way to go," says McDonald. "But think out of the box. Might the seller be willing to take payments out of future revenue?" As the buyer this could be a wise strategy, only under rare circumstances would I recommend it for the seller. Other options to consider are a home equity loan or borrowing from family. Again, these aren't always the wisest options, but in limited cases may be worth considering.
No matter your approach to funding, you must perform due diligence prior to making your decision. Ask for access to all business records and look for pending litigation, tax audits, insurance disputes, or any other liabilities. Also, do a thorough search for any existing liens.
Can you compete with private equity firms?
Although private equity firms are scooping up many small businesses, prospective individual buyers may have an advantage. Culture and values are important to many retiring entrepreneurs, so they may want to sell to someone with a similar vision. They've poured years of sweat equity into their business; let them know it's your intent to do the same and they may prefer your offer over others. Some owners may agree to a discount if you pay cash for the business.
Where do you begin your search for a business?
There are online business marketplaces, auctions, and business brokers to consider. Oftentimes, someone who is already in your contact list is th best resource. The more specific you get in terms of the type of business you are looking for, the more likely someone will have a connection for you. Ask people in your leads group, business-related Facebook groups, and any business attorneys and accountants in your circle of influence.
What money-related red flags should you look for?
"Buyers should understand the seller's discretionary earnings, or adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization)," says Byers. "Some business owners minimize their business for tax purposes. If you get an SBA loan the bank will order a valuation after you negotiate with the seller." That process will take this valuation marker into consideration.
Most significantly, don't bank on the current business owner knowing and understanding all of the important facts. Make sure to engage the help of qualified professionals in valuing the business and writing the sales agreement and any other contracts. This simple, often neglected step could stop many business owners from making a devastating mistake.
How do you know if acquisition is right for you? Just get the wheels turning, speak with your mentors, and do a little research. Who knows where tossing the idea out there may lead you?