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steps to identify the ideal sector and company to buy

When buying a company, it is important to know how to find the best company, and in order to do that, one must know how to first identify the ideal sector. In this article, we walk you through the 6 most important steps to finding that ideal company for you.

Choosing the ideal sector

“If I had an hour to solve a problem I’d spend 55 minutes thinking about the problem and 5 minutes thinking about solutions.” – Albert Einstein

All sectors have a tendency: to go up or down.

1- Analyze if the industry is concentrated (with only a few but large-sized players) or fragmented (many but small players). In those industries that are very concentrated, the leaders establish price. If it is fragmented, you have more possibilities of finding a leading candidate within a niche. Try to buy a company with a dominant position in that niche.

2- Analyze the structure of the industry and where it is going in the next 5 years. The ideal industry is one that will grow in the future and is fragmented – where the companies tend to be of small or medium size. Try to find one of these industries to which you can apply your experience and knowledge. In a fragmented industry, you avoid the presence of a giant that can disrupt the competitive landscape by, for example, changing the prices or conditions of the market.

YOU MIGHT ALSO BE INTERESTED IN, “HOW TO FIND AND BUY A COMPANY.”

3- Avoid industries in decline since they tend to hurt themselves with constant price reductions of the competitors to cover fixed costs and end up destroying margins.

4- Try to not enter industries that have intense competition, with low barriers to entry, high consumer negotiation power, and are subject to external factors that cannot be ignored (regarding regulation, technology, environment, fashion, etc.) The three key factors that determine the intensity of competition within an industry are the competition within the companies that are in it, the threat of new entrants, and the threat of substitute products or services. The level of competition in the sector is an indicator of the potential for high or low margins.

5- The size of the company you should buy depends on you and your experience. However, if you are not a “mega-executive” and do not have experience buying companies, it is best to buy a company that has a turnover between 6 to 12 million euros. That is an ideal size for your first operation because in those sizes, there tends to be a corporate structure to which you can make changes to significantly alter its ability to create value.

6- If you do not have a sector that you specialize in or do not know where to look, it is best to look in sectors that are fragmented based on geography or product line.

The ideal company

The ideal situation would be finding a company that is growing and that has a competitive advantage, that generates a healthy and constant margin, with profits above 15% of sales and with growth possibilities on various fronts.

In this ideal company, customers do not change and their concentration is low. Naturally, these companies are not cheap, but it is much better to buy a good company than to buy a bad one at a bargain price.

This article was written by Enrique Quemada, ONEtoONE President.

Why sell a business when legislation changes

In this article, we briefly discuss why sell a business when new legislation changes negatively affect companies’ growth. We will also tell you the story about a client running a business in the chicken farming sector who finally decided to sell his company because of these changes. Let’s go!

Legislation changes could affect your business

It is common for new laws to cause a lot of stress for companies. In many cases, business owners can foresee the change coming because they are also operating in other countries that have already gone through a similar process. That is why they can take the initiative and sell before this causes a crisis.

Other times, a regulatory change requiring a strong investment creates a need for external capital because the internal cash flow generation is not enough. For example, new regulation might require important investment that the business cannot afford because of its size or growth path.

This situation happened to us with a client in the chicken farming sector. A new animal protection legislation required an increase in the standard of living of the hens, which meant important capital requirements. Our client was not willing to risk his own capital for the needed investments and was afraid of asking for debt, fearing the free cash flow produced by his business would not be able to pay it. After we analyzed and discussed the alternatives, the client decided to sell. We had a Dutch group and an Italian group bidding against one another. It was the Dutch group who eventually won the bid for the company.

THE NEED FOR AN INCREASE IN CAPITAL TO STAY COMPETITIVE IS VERY COMMON. DO YOU WANT TO LEARN MORE ABOUT IT? HAVE A LOOK AT “REACT TO YOUR COMPANY’S NEED FOR CAPITAL BEFORE IT IS TOO LATE!”, YOU WILL FIND AN INTERESTING STORY ABOUT A CLIENT WORKING IN THE MANUFACTURING OF MACHINERY FOR FOOD PRESERVATION.

Do not wait until it is too late

One way to survive and maintain the value of the assets (clients, brand, products, technology, etc.) is to merge into a larger group. Many business owners wait until it is too late. They do not want to recognize how critical the change is.

If you want your company to survive when there is a critical change in your business environment, react with urgency because the finding of a good buyer and all the negotiation process will take time.

This article was written by Enrique Quemada, ONEtoONE President.

ONEtoONE Corporate Finance in India after having redefined M&A standards in 23 countries

ONEtoONE Corporate Finance India opens its doors!

ONEtoONE Corporate Finance starts its collaboration with the Indian ILO Consulting to offer M&A services to SME sectors. In this article you will learn more about ONEtoONE, ILO Consulting Pvt. Limited and the event we organized together in India to present our objective and expertise.

ONEtoONE Corporate Finance and ILO Consulting: what to expect from this partnership

ONEtoONE, the global Mergers & Acquisitions Network based in New York & Madrid has joined hands with ILO Consulting Pvt. Limited to offer its bouquet of M&A services to Indian businesses. “Global Investment Opportunities Meet” was organized by ILO Consulting, the New Delhi based growth advisory firm welcoming ONEtoONE Corporate Finance to India on the 12th April, at India Habitat Centre. Indian Corporates held interactive sessions with ONEtoONE team travelling to India during the event. The combined ONEtoONE ILO Consulting entity brings several equity, debt & divestment opportunities for an unprecedented value range of Rs. 30 crore to Rs. 1000 crore to Indian businesses.

Enrique Quemada, the Chairman ONEtoONE on the occasion pointed out, “We are extremely excited that we have joined hands with one of the leaders of M&A activity in India, ILO Consulting for the Indian markets. ONEtoONE Corporate Finance specializes in helping small & medium businesses (SMEs) realize the optimal & best value for their business from our rich experience as well as deep connections with investors in 23 countries worldwide. The combined ONEtoONE ILO Consulting entity would bring our entire M&A suite of services like equity placement, buyouts, private placements, debt advisory to Indian businesses”.

Gautam Khurana, Director ILO Consulting on the launch event said, “Having serviced Indian businesses for nearly 25 years, we know the importance of friendly, cheap & patient capital; technology & products for the Indian businesses. ILO Consulting has engineered some landmark joint ventures & investments by foreign businesses into Indian companies and we feel we have found an ideal partner in ONEtoONE Corporate Finance. Having worked with advisors from 70 countries, we find the ONEtoONE team amongst the best and most resourceful we have worked with in the last 15 years. With the entry of ONEtoONE in conjunction with ILO Consulting in India, we feel empowered with the rich investor base, access to corporates from more than 55 countries and fund raising experiences of decades from Europe, North & South America, China & other parts of the world. I look forward to serving clients with new capabilities & help in the ‘Make in India’ & growth push initiatives of Indian government”.

Panos I. Alivizatos, executive & board member of ONEtoONE Torronto & India said, “This collaboration allows us to guide foreign private equity funds to be invested in unique opportunities in India. We can help Indian companies to get more extrovert either through M&A transactions, equity raising or through the global debt capital markets. For the Indian companies that invest in Canada, we can find the right investment target to expand”.

About the Event

“Global Opportunities Meet” the event held on 12th April at the India Habitat Centre, Lodhi Road, New Delhi. The event was attended by about 30 SME companies mostly from the New Delhi & NCR region from various sectors such as waste management, light Engineering, Solar Energy, Aviation, Auto components, Engineering design, Power, Oil & Gas, IT & software, Hospitality & Tourism, Wind Energy, Banking & Finance etc. Most of the participants were keen to understand how OnetoOne Corporate Finance could help them in drawing international capital & technology. There were many discussion on Overseas Acquisitions; Fund Raising & Long-term debt financing for growth; Asset & Project Financing and Private Equity & Public Financing. We estimate business about USD 30 Million was discussed during the meet.

About ONEtoONE Corporate Finance

ONEtoONE Corporate Finance has an established international team of mergers and acquisitions specialists in the middle market. The team has carried out more than 1000 assignments. The defining feature is their ability to find interest and close the deal with companies or investors who will pay the most for the client’s business. The greatest strength of the network lies in its worldwide reach & ability to search the strategic partners from over 20 million businesses, 8,000 private equity funds and 50,000 Family Offices, irrespective of the geographical location & client’s financial topography.

Business onwners' hard decision-making moments

The tough decisions of business owners

Business owners make tough decisions every day: when they must decide between tapping into his home equity line to finance his business or running out of operating capital for a new project; when they have to fire their employees who have become close friends just because sales are down; when they need to make an equity investment to renew the equipment. These are just a few examples of the tough decisions that business owners make every day. Learn more by reading this article written by Enrique Quemada, ONEtoONE President.

When you absolutely need to invest

Here is an interesting story. A client was having trouble convincing his wife that they should reinvest some of their savings into renewing their printing equipment because their competitors had all upgraded. Without this investment, the company was destined to disappear. She did not understand why he wanted to risk their savings so close to retirement, but then she, too, realized that the company would die otherwise. He had spent all his life building his company and could not bear seeing it plummet. ONEtoONE was hired to secure the capital that banks did not want to provide, and we found a strategic investor from Italy.

Problems and decisions that business owners face everyday are overwhelming, and they are the only ones who know about them, their significance, and potential consequences. If you are an entrepreneur, you know it: your family thinks you are self-centered and feels neglected. You are constantly unable to attend family events, and your spouse and kids think they are a second priority. You do not want to worry them, so you prefer not to share your business problems with them. That is why they do not know you are under pressure and your decisions could potentially ruin all that you have built.

How to enjoy life again

A friend of mine could not manage the situation, and as a consequence, his marriage was destroyed. He could not understand what was happening, and when he realized it, it was too late. The divorce was hard, and his wife took everything but the company. The pressure was tremendous, and the loneliness made it even worse. Then, the company started to suffer because of the situation, so he came to us looking for advice. His industry was growing, and we looked for a potential buyer. We found a Canadian buyer who bought the company and offered him a C level position to run a new division. Selling his business gave him the peace of mind he desperately needed, and the opportunity of being involved in a new project helped him to enjoy life again.

You do not need to go through this dilemma forever. There is an amazing M&A wave today. Prices of public companies are at the highest they have been, and liquidity is abundant. If you are tired of the hardships and the loneliness that comes with being a business owner, 2018 is the time to sell.

“The keys to M&A” | Episode 2: Offensive and Defensive M&A Strategies

]M&A transactions can be used to further many types of objectives, including strategic business objectives, financial objectives, tax objectives and risk management objectives.

In this podcast, we discuss ways that M&A can be used to carry out different types of offensive and defensive strategies to strengthen and protect business value.

PREPARING YOUR COMPANY FOR ITS SALE

Creating a to-do list for preparing your company before selling it can help you create an action plan before putting it on the market. When the time comes to sell your company, you have two options. You can begin the process immediately, putting it up for sale in its current state, which may mean lowering its value to potential buyers in the negotiation stage. Or, you can delay its sale until you have invested enough time to improve the way in which potential buyers see your company. This choice depends on personal motivations as well as the other objectives of the business owner.

If you choose the second option, here are the four basic steps to follow before the sale:

1.Obtain a valuation.

Surely you have an approximate value for your company in your head, but is it reliable? Getting help from professionals who are experts in this area can provide you with a figure that is objective and realistic for your company in the current market. A value analyst can also aid you in determining what the strengths and weaknesses of your company are and, thus, come up with strategies to increase its value.

2.Reduce dependency on the owner.

You believe that your business cannot function without you and your employees. By reducing this dependency, you increase its value for the buyer. In order to achieve this, it is important to plan the sale with time and patience to find the right people to put your trust in and delegate your responsibilities.

YOU MIGHT ALSO BE INTERESTED IN, “BEFORE ACCEPTING AN OFFER, STUDY THE BUYER.”

3.While strengthening your company to present it to buyers, keep your sale plans as private as possible.

Share your intentions to sell with only key personnel and external consultants only when necessary or when information is accompanied by a confidentiality agreement. Always emphasize the importance of maintaining the privacy of your sale intentions. If news that you are planning to sell your company arises, you run the risk of creating uncertainly among your employees, clients, and suppliers. This could decrease the company’s value, just when you need it to increase.

4.Develop a memorandum of sale.

Your company should be described in an easy and concise manner. When you have a memorandum of sale (also known as information memorandum) for your company, you increase the trust of the buyer and reduce diligence problems, making the way for a simpler and faster sale. This memorandum of sale should include the history of the company, industry information, a description of the company’s operations, its strengths, market strategy, and prediction for the future. The financial position and financial and operating tendencies could also be included.

At ONEtoONE, we understand that, in respect to a corporate operation, the valuation is a negotiation tool. The creation of a value report is a fundamental part of a successful negotiation to be able to maximize the price with arguments backed with concrete and accurate numbers.

This article was written by Enrique Quemada, President of ONEtoONE Corporate Finance.

HOW TO FIND AND BUY A COMPANY

To buy a company is a long process, and in it, there are moments of intense emotions, breakdowns, and crisis, when it seems like the deal has fallen through, unable to be saved.

As M&A advisors that have participated in numerous operations know that it is a matter of tenacity – of not abandoning – of looking for creative solutions that keep the deal alive again and again until it is finally signed and closed with the satisfaction of all parties.

Who can buy a company

There are times when the opportunity knocks at your door, and if you are psychologically prepared, you can capitalize on it. But this is not usually the case. Usually, the opportunity is close to you, maybe in the very same company where you work or in a related sector, but you think that you have to create it. And other opportunities do not appear unless you look for them.

Do not rush the choosing or buying process. Be patient and work on various deals at a time. If a deal falls through, take it as a learning opportunity to make a better purchase next time.

We recommend you not to get fixated on a robot company but instead to be flexible and dig deep into the companies before rejecting them since you can be pleasantly surprised. However, at the same time, you should be proactive and define what you are looking for.

YOU MIGHT ALSO BE INTERESTED IN, “6 STEPS TO PURCHASING A BUSINESS.”

The importance of the sector when buying a company

If you have experience in a determined sector (even if you may be sick of it), we recommend that you search in this sector or those related to it. If you have experience in machinery rental, do not look for restaurant chains. This sector might not look attractive to you because there is excess capacity and because construction has suddenly fallen, but there are many other subsectors with similar characteristics that are doing well. Look for opportunities in the rental sector to which you can transfer your years’ worth of experience. Do not begin in an industry that is completely new for you because the learning curve may be very steep, and you may be taken advantage of during the purchase process.

I remember a company that we were trying to sell. A financial advisor was interested in it and made us all go crazy by asking us financial models and sensibility analysis about the future even though he was not sure about buying the business. On the other hand, the seller’s competitor saw the equipment (in this case, ships) and said, “I’ll pay 30 for it.” He sealed the deal. He understood the value of the company because he was perfectly familiar with the sector.

This article was written by Enrique Quemada, President of ONEtoONE Corporate Finance.

Why is there so much cross-border M&A

The trend of increasing cross-border M&A has accelerated with the globalization of the world economy.

Growing interdependence and the entrance of foreign players as cross-border M&A causes

The growing interdependence between worldwide economies has increased corporate transactions between countries. Companies need to acquire enough critical mass to be able to compete against global players.

The entrance of larger, competitive foreign players shrink margins and at the same time force local companies to spend more to keep up with their research, development and innovation capacities. To survive, many companies are forced to merge in order to reduce cost or gain enough market share to create economies of scale.

DO YOU WANT TO KNOW MORE ABOUT HOW TO DEAL WITH MARGINS THAT ARE GETTING STRETCHED? HAVE A LOOK AT “IF YOUR PROFITABILITY IS DECREASING, REACT BEFORE IT´S TOO LATE“

Having to deal with foreign companies that are more competitive in terms of cost, size, research capacity, development or innovation, means that many companies need to look for ways to reduce costs via productive synergies with similar companies or obtain a sufficient market share in order to produce economies of scale.

Cross-border M&A and sell-side operations

The good news for sellers is that strategic acquirer are willing to pay a premium in a cross border transaction. Also, in a cross border deal, the buyer is usually willing to respect the management team of the target company.

When analyzing who might be the best buyer for your company, the key is discovering which company is the one that can obtain the most value by acquiring your company and, as such, can share more of this value with you by paying the most.

Remember that the best buyers aren’t looking for you. You are the one who needs to find them and woo them.

A big percentage of the success of a sell side operation depends on the search of the best potential buyers worldwide and reaching out to the key people in those organizations, always with confidentiality throughout the entire process.

DO YOU WANT TO LEARN MORE ABOUT SELL-SIDE OPERATIONS? GO TO SELL-SIDE SECTION AND DISCOVER HOW TO SELL YOUR COMPANY!

This article was written by Enrique Quemada, ONEtoONE President.

BEFORE ACCEPTING AN OFFER, STUDY THE BUYER

Many business executives wait for a buyer to show up someday, never stopping to think about the flawed logic of accepting an offer and selling the company to whoever gets there first. Is this the best buyer? Is this the one who can pay the most? It will be a remarkable coincidence if it is. It is much more likely that it is not. Also, since they are the only buyers, their bargaining power is far superior to yours.

The importance of research

If you want to maximize sale value, you, or the advisors you hire, must go through a rigorous process of finding the best buyers or investors. Buyers will be those who have the best synergies with your company, who are the strongest financially and who recognize the strategy—the value of your company (wherever they are). Then, you will have to make them compete to increase the price.

YOU MAY ALSO BE INTERESTED IN, “NEGOTIATION IS YOUR POWER WHEN SELLING A BUSINESS”.

Price is not one-dimensional

Price is an essential aspect of any negotiation, but the likelihood of closing the deal also lies in who we give exclusivity to for due diligence. We may receive an excellent offer from someone who has little hope of obtaining financing or who is known to negotiate hard at the final stage after due diligence.

Therefore, before accepting an offer, it is good to study the buyer’s actual financial capacity and acquisition history. By studying how he has performed in previous acquisitions, you will learn a lot about his behaviour. Once you grant exclusivity to a buyer and tell other potential buyers that you have accepted another offer, it will be more challenging to go back to them and get them interested again.

Enrique Quemada, president of ONEtoONE Corporate Finance, has written this article.

YOU MAY ALSO BE INTERESTED IN, “WHAT SKYDIVING AND SELLING YOUR COMPANY HAVE IN COMMON”.

Company valuation and investment risk - sharing formulas

Bridging company valuation disputes with investment risk-sharing formulas

Many private investment transactions do not close due to issues about how future business risks are allocated between the parties. Investors often want to take as little risk as possible, which leads to them offering lower entry company valuation. Company owners, on the other hand, often reject low company valuation on the ground that they do not capture the company’s future growth potential.

Rather than let these often opposing perspectives derail investment transactions, creative deal structuring can allow future business risk to be shared between the parties in a way that allows deals to get done and company valuation based on forward-looking risk analyses to be replaced with actual business performance.

How Does Risk Affect Investment Terms?

Investment risk has a major impact on investment terms. In many types of investments in companies, investment terms are based on company valuations. Company valuations, in turn, are often determined based on a company’s future cash flows, which are discounted back to the present through a consideration of the perceived risks related to those cash flows. The higher the risk is perceived to be, the lower the company valuation.
This is a major problem in investment negotiations, because apart from the natural economic inclination of parties to approach valuation in a way that favors their own interests, valuation is significantly complicated by the fact that no one can predict the future. This unavoidable inability leads to investors as well as company owners trying to convert the unknown future into an often rigid valuation formula, a process which in pure financial terms almost invariably works to the detriment of one of the parties.

IF YOU ARE INTERESTED IN LEARNING MORE ABOUT COMPANY VALUATION YOU CAN ALSO READ THE VALUE OF NOTHING – HOW TO ACCURATELY CALCULATE A COMPANY’S VALUE

While one might take the view that investment terms upside or downside that results from inefficiencies in valuation is an unavoidable part of the investment process, the reality is that, rather than causing one party to leave money on the table, these uncertainties often lead to investment transactions not closing. This is a problem that has significant negative implications, not only for companies and investors, but also the capital distribution infrastructure that lies at the base of every economy.

Risk-Sharing Formulas

An alternative to the zero-sum approach to risk allocation in discussing deal conditions is to design investment terms around formulas that allow risk to be shared rather than unilaterally assumed by one of the parties.

One common risk sharing formula is an earn-out. With an earn-out, a portion of the deal consideration price is deferred to the future and paid upon the company reaching certain agreed milestones, such as with respect to sales, EBITDA or net income. With this type of approach, the seller can effectively receive a much higher entry valuation based on strong company growth if the company can actually achieve that growth. If it can’t, the investor will not overpay for forecasted business performance that never occurred.

In addition to the earn-out, another approach that can be used is bonus or incentive payments that reward management in the event that agreed financial or operational thresholds are met. These types of formulas can allow the economic benefits of higher valuations to be replicated without putting in place complicated post-closing terms and conditions that can create legal and practical issues down the road.

Issues to Keep in Mind

Risk-sharing formulas such as earn-outs can be powerful tools to help bridge valuation disagreements in private investment transactions but there are issues to keep in mind to make sure that these formulas solve valuation challenges rather than create new ones.

Simplicity. The first issue is to make sure that the risk-sharing formulas that are used are simple, clear and easy to apply. The more complex that risk-sharing formulas are, the greater the risk that they will lead to disputes in the future.

Control. The second issue is level of control of the parties over risk-sharing formula drivers. If formulas are based on results that can be manipulated through operational or accounting techniques, the benefits of risk-sharing formulas can easily be lost.

Timing. A third issue to keep in mind is the timing of the implementation of risk-sharing formulas. Future risk is of course not fixed, and as the business moves forward in time the risks its faces will change, rise and fall. Accordingly, the further out in time a risk-sharing formula is structured, the greater the likelihood its utility as a mechanism to apportion risk and the economic benefits related to future business performance will fall.

While they need to be applied with care, risk sharing formulas can be helpful ways to bridge valuation disagreements in private investment transactions and increase the likelihood, not only that deals get done, but that get done on terms that are fair for all parties.

DO YOU WANT TO LEARN MORE ABOUT THIS TOPIC? HAVE A LOOK AT “WHAT IS MY COMPANY’S BRAND WORTH?”

This article was written by Darin Bifani. The photo for this article was taken by Leio McLaren on Unsplash.