Tag Archives: Buy side

Vendor Finance in the Purchase of a Company

Did you know the owner of the company that you want to purchase can finance the operation? It´s is not a hoax, it´s a form of financing known as vendor finance. Undoubtedly, this is the best type of financing to buy a company. keep reading to discover why!

How to Get the Seller to Finance Your Purchase

Once you have found the best business to buy, understanding the needs of the seller is key to create more possibilities to be able to structure an agreement that fits both. When there are liquidity crisis environments, sellers find that if they want to sell their companies they should help by facilitating financing, that is, allowing part of the payment to be paid through deferred payments.

You would think that the seller is the one that is most interested in the operation being done and the one that should have more faith in the creation of value capabilities of your company.

In a financing agreement with the seller, in which he accepts deferred payments, it is going to be easier than agreeing with the bank that the company’s own shares are a guarantee in the event of default. That is, that the owner recovers the ownership of the company in case you, as a buyer, do not comply with your payment obligations. He knows the true value of his company and knows how to manage it properly. Thus, if such instance should to occur, he should not have much trouble if the property is reverted. He knows the company perfectly well and believes in it, so he should not attribute the risks that he would assign, due to ignorance, to a stranger.

If, however, you want to give the shares of the company to a bank as collateral for a loan you will find that option inconvenient. Banks are not seduced by the idea of having to manage a company and, not knowing it, they apply a much higher risk rate than that assigned by their previous owner.

With Vendor Finance There Is No Fight for Interests

Another very interesting feature of the vendor finance is that the seller usually does not fight interest on deferred payments, unlike any other lender. Their concern is focused on selling the company and its price, not interest. This can be very significant in the true final price of the operation. For example, if instead of paying 5 million cash you pay 1 million a year for 5 years without interest – considering an interest rate of 8% – you would actually be paying 3,992,000 euros.

In addition, the value of the company is still in it and not yet in the seller’s pocket, so it should not be difficult to assume that part of the value remains within the company for a while

To learn more about other types of financing and what they depend on click here.

What If the Businessman Resists a Structure of Deferred Payments (Vendor Finance)?

Initially, it is likely that the business owner will resist a structure of deferred payments (vendor finance) since it is not what he had in mind when he decided to sell his company. Your challenge, as a buyer, is to persevere with the approach until he agrees.

If he resists completely, you should ask yourself questions like “Is the owner hiding something that you do not know? Will the company not be able to pay? or did he not tell you it was a cash generator?”

Maybe the seller has valued his company at 10 million euros and you explained that, since he has 7 million between bank loans and lines of credit, the value of his shares is 3 million. So, you find that the seller wants the 3 million, but you do not have the money. Since he wants to sell and can not find another buyer, you offer the possibility of buying it in several deferred payments.

You have already studied the company and know that it generates 2 million euros of EBITDA (profit before interest, taxes, amortizations and depreciations). The financing that the company already has pays an average interest of 7.15%, so you will have to allocate from the EBITDA 500,000 euros to pay the banks. You only have 1,500,000 euros available per year to generate dividends and pay them back.

Given the situation you are in you can propose the following structure: I am willing to pay you 500,000 euros cash, another 500,000 at the end of the first year and one million euros a year for the next two years. Remember that you must reserve money to finance the growth. Think that now, the company is yours.

Within a more globalized world, the buying and selling of companies is a great way to approach a new market or reinforce a competitive position. The main difficulty involved in this type of operations is knowing how to approach them so as not to be deceived and maximize our value. If you are considering buying a company and are looking for advice, do not hesitate to contact us!

The Types of Financing for a Business Purchase

Business Purchase: Types of Financing

If you are thinking of buying a company, there will come a time when you will need to consider how to manage the company’s payment, or as such, how will you finance the purchase. Within the market you will find different types of financing options, and here we will be discussing the main ones.

Crucially, you must have in mind the current point of the economic cycle at the time of your purchase. When the economy has less liquidity, debt is going to be more expensive given the heightened demands from banks with direct respect to the increased interest rates one would face if they were to be borrowing money at the time. In turn, if the bank perceives your venture as high risk, then they will double down with even higher interest rates on top of the already increased levels. As a result, you must be confident in your ability to pay back your debt, if you choose to go down this line of financing during a time when the economy is holding less liqudity.

What does the types of financing depend on?

The types of financing you can access will depend on:

1- The operating cash flow that the company has had to date (net profit plus amortization)

2- The quality of the collateral (guarantees) that you give

3- Your prestige, along with that of your partners

4- The business plan. If you are implementing your business plan, take a look at SIX STEPS TO A GREAT BUSINESS PLAN! This article identifies six steps that entrepreneurs and companies should keep in mind when creating their business plans.

During a company purchase, there may be different bank debt tranches and they are differentiated by the preferences regarding collection and interest paid. The types of debt that are more focussed on collection will typically demand higherinterest because they incur more risk.

Importantly however, when buying a company you can use multiple levers of debt.

Short-term bank financing

If we talk about short-term bank financing you would have:

Loans to finance working capital that are obtained from financial institutions, which may be in the form of loans, lines of credit or discount of effects.

Next, you have financing through accounts receivable such as factoring (the sale of the debts of other clients) and confirming.

Long-term bank financing

On the other hand, long-term bank financing is quite frequent in leveraged purchases (with indebtedness), in which different types of debt are used depending on the excesses and cash needs foreseen for future years:

The one that charges the least interest would be the debt with mortgage guarantees. Given it has physical collateral to support its loan, the bank is reassured that if the debtor does not pay them back, they can keep the asset. The bank therefore assumes less risk and therefore is willing to lower the interest rate in comparison to when there are no assets present to support the payment. As such, it is possible to obtain financing for up to 80% of the value of the property and in turn, you can agree on a longer return period.

There is also the Sale & Lease back concept, which consists of the sale of a company asset and the simultaneous realization of a financial lease contract on that asset. Therefore, the ownership of the property is transmitted but a right to use it is maintained. This allows the seller to take the entire amount generated by a sale and continue in the same facilities, whilst paying a rent.

An option that is typically associated with higher interest levels is that of Senior Debt. It is named this way because it has a preference for collection with respect to the rest of the associated debts. There can be a deadline of agreement between a period of between 5 to 7 years, redeemable annually and with a grace period of 12 or 18 months. This type of debt already has protection clauses (also called financial covenants), which are obligations to meet certain ratios (Debt / EBITDA, EBITDA / Interest, Minimum own funds, etc.). Thes obligations are typically reviewed on a quarterly basis.

If the company does not comply with these ratios, economic penalties or accelerated depreciation clauses can be activated. Moreover, you will often be asked to pledge the shares of the company you buy. Given that these clauses that the banks require are mainly based on compliance with the business plan, it is recommended that you are conservative in your construction of the plan, because a failure to comply can lead to the bank demanding a renegotiation of conditions that will often charge you more commissions and higher levels of interest. Some additional covenants that can be imposed on you are that of the prohibition to pay dividends, repay loans to the owners or carrying out further corporate operations.

Banks can also add further debt limitations in the contract to that provided in the Business Plan and in turn, require you to contract the lines of financing of the currency with the same financial institution. They can also put limitations on fixed asset investments, by way of not letting you exceed what is established in the Business Plan. They may demand that there be no changes in the shareholding during the life of the debt and negotiate for early repayment formulas, so that you use the excess cash that is generated to repay the debt, instead of allocating it to the growth of the company. All of this will be possible depending on your negotiation strength and the risk of the project.

Participative loans consist of the contribution of funds to a company in exchange for remuneration, which is based on a variable interest rate that depends on the evolution of the borrowing company. The advantage to this strategy is that it is based on an order of priority for repayment, which typically sees the associated bank put behind on that list, with the investors placing participative loans considered the priority. Importantly however, the investor that grants the loan does not get included in the capital structure of the company.

Mezzanine Debt is another form of financing, which perhaps can be considered as subordinated by the previously mentioned types. However, there are funds that are specifically specialized in granting this type of financing. It is called a mezzanine because it is ahead of shareholders in collection rights, but behind with respect to the other creditors. As the borrower assumes more risk, it is a type of financing with higher interest rates (between 15 and 25%), which usually has 100% amortization at maturity and a longer repayment term: 8 or 10 years. It allows the Company to have free cash flow during the life of the debt, in order to implement growth and development strategies. The restrictions (covenants) imposed by the lender are also relatively minor.

This type of debt allows the grantor the possibility of accessing capital through the purchase options released, so that if the project goes well, the borrower can also earn a lot of money. In other cases, the investor also acquires a percentage of the capital and accepts only to charge interest when there are benefits in doing so.

It is usually agreed that the repayment of the loan and its interest must be made in full before the shareholders receive any dividends.

Preferred shares

Along with the different types of debt, you can also choose to give out preferential shares: these shares do not usually have the voting rights associated with them, however they are placed ahead with respect to collection rights in comparison to the other shareholders. Importantly however, they are still behind any type of debt financing in the event of liquidation.

There are infinite models of preferred shares because they are issued according to each company and their individual circumstances. There are preferred shares that give your holder the right to receive a certain dividend and if it can not be paid, accumulate it when possible. Other preferred shares are convertible, so if the company goes very well, they can convert it into normal shares, whilst if it goes poorly they can accumulate their right to dividends until they can be paid, given that they have collection priority. Resultantly, this holder has more upward travel and is considered to be more protected.

Within a more globalized world, the sell and purchase of companies is a great way to approach a new market or reinforce a competitive position. The main difficulty involved in this type of operations is knowing how to approach them so as not to be deceived and maximize our value. If you are considering buying a company and looking for advice, do not hesitate to contact us and learn more about the different types of financing!

Airline Industry Consolidation

Since the Airline Deregulation Act of 1978, the aviation industry has unquestionably remained one of the most ultra-competitive sectors within the world of business, hence the airline industry consolidation. Come 2018, and the unrelenting struggle over squeezing margins, ever-expanding passenger numbers and volatile fuel prices has seen the recent departure from the sector of the likes of Monarch Airlines, Air Berlin and soon-to-be Alitalia.

In a bid to keep their planes in the sky, airlines have resultantly looked to convergence-type strategies such as mergers, airline groups and joint-ventures so to remain well-connected, competitive and relevant in an industry that is often dominated by the heavily subsidized, government-backed carriers such as the infamous Gulf State three: Emirates, Qatar Airways and Etihad. In turn, the apparent need to form these various partnerships has the capacity to create the most unlikely instances of collaboration; all in the name of getting that extra bum-on-seat.

	US	Europe
Oneworld	American Airlines	IAG
SkyTeam	Delta Airlines	Air France-KLM
Star Alliance	United Airlines	Lufthansa Group

Table 1. Outlining the current formation of major Airline Groups, and their corresponding Alliances within the US & Europe

Everyone is Wanting a Slice of the Pie

It is as truly symbolic as it is reflective of the industry’s cutthroat nature, that a French and Dutch airline would choose to join forces, or for an industry leader such as Qatar Airways to still seek out codeshare agreements with the likes of British Airways and Iberia, as a part of their 20% stake in IAG. Even more recent, one of the most quintessential rivalries has been eased, with Qantas and Air New Zealand (who originate from different alliances) announcing a new codeshare agreement that covers their respective domestic networks.

Amongst the benefits of heightened connectivity and market share, consolidation within the aviation industry has the propensity to generate significant innovations amongst airlines, which will ultimately seek to combine their resources. For example, an airline group that connects each member’s respective digital presence and AI mechanisms, has the enhanced ability to create a business that genuinely understands the wants and demands of its customers. With this improved access to information, an airline group can more accurately implement strategic changes, recognizing whether there is more value in developing a new low-cost carrier (LCC), or investing further in the quality of their full-service airline etc.

So, What Can We Expect to See in the Airline Industry?

At present, the industry continues to churn out more and more agreements, with Fiji Airways having just been confirmed as a Oneworld “connect” partner, which will in turn link the Pacific Island nation to the alliance’s extensive network. Closer to home, the notorious LCC, Ryanair, have publicly stated their interest in developing an airline group of their own, touted as Ryanair Holdings. Such an entity could have fascinating implications for the industry, with the prospective project having the potential to become the sector’s first ever LCC-specific airline group. All the while, IAG has also made public their desire to acquire another up-and-coming LCC in Norwegian Airlines. Finally, Lufthansa Group are also considering the potential acquisition of the bankrupt Alitalia, whilst also having been linked to the Sweden-based Scandinavian Airlines (SAS).

A logical question to ask at this point is what does all of this consolidation tangibly mean for the average customer? Arguably the biggest thing for a passenger to understand will be the heightened value of loyalty to an airline alliance. With more airlines continuing to bolt on to one of Oneworld, SkyTeam or Star Alliance, it might simply be a matter of choosing an airline and its corresponding alliance and sticking with it. The exhaustive membership list of these alliances mean that no destination will be unreachable, regardless of which partnership you are associated with. In turn, by sticking loyal to one alliance you will ensure that you gain access to discounts, seamless connections when travelling internationally, and the increased likelihood of that ever-elusive upgrade.

As such, both airlines and passengers can, and are, finding safety in numbers by way of benefitting from the implications of the industry’s ongoing consolidation.

Due Diligence: Working Capital & Investements

Previously, we have explored the concept of Due Diligence its importance throughout the process of buying a business. In the following article, we will explain two important aspects to analyze during this crucial phase: The concepts of working capital and other investments.

The Working Capital

We recommend that in the due diligence process that you pay special attention to the working capital (current assets and current liabilities). As such, you must compare the situation with the company’s current assets and liabilities with the two previous years and see if there are significant variations. If there are, they may be making “arrangements” to make the company appear to be worth more than what they truly are.

1- Collection days: It is a ratio that tells us the number of days that acompany takes to charge its customers. If the collection days are getting longer, you may be exposed to a payment problem. It may represent more sales and profits in the income statement, but customers in reality will not be paying as stated. Resultantly, there will remain the possibility that you will face a future liquidity problem. Moreover, the company might have increased its sales a lot, but achieving this so to be able to show a temporary increase in clientele is a rather futile and useless concept to a potential acquirer. Adding to this, if the days of collection have shortened a lot in recent months, the seller may be intentionally accelerating the collection so to increase cash levels in the short-term and in turn, increase the valuation of the company at the time of sale. If this is the case, the company you seek to acquire will be taking money that is yours away from you, and you will be left with an empty space.

2- Stocks: It is a ratio that tells us the number of days of purchases that a company has in store. If we have 60 days of stocks, everything that will sell in the next 60 days can be considered as in stock. If the stock days have lengthened in recent times, you may have a lot of obsolete material that has no outlet. If they have shortened with respect to previous years, the seller may have sold stocks in an accelerated manner so to increase cash levels in a bid to either take it for themselves, or add it to the sale price.

3- The days of payment: It is a ratio that tells us the number of days that the company takes to pay its suppliers. If the ratio is 60 days, it means that everything that has been bought during the last 60 days has yet to be paid. If paydays have shortened, suppliers may not trust the company, along with their financial situation and in turn, are being required to pay cash if they want to be sold their required goods. Another alternative is that they are mismanaging their payments (making them too soon), in which lengthening the payments out would allow an increase in cash generation. If a company lengthens the days of payment, it may mean that it is delaying payments so that there is more cash at the time of sale, so to increase its value.

If you see inconsistencies between these ratios and those of previous years, you should investigate further and look for an explanation. It is good that you also compare data from the competition (days of collection, payment and stocks) and see if there are significant discrepancies (there should not be, but if there are, you should analyze why). Companies like INFORMA or AXEXOR can provide you with the key figures of their main competitors, all based on the information that they present in the Mercantile Registry.

If you see that there are clear inconsistencies in the working capital that are affecting you, you should propose a lower purchase price that eliminates the effect of the manipulations. You are looking to buy a company with a stable working capital, not one that has been manipulated last year for sale.

If the company’s sales are seasonal, do not use the end-of-year working capital fund, instead you will have to calculate the working capital average and the debt of all the months so to have a real vision of the company. Importantly, if you buy the company when the activity and cash levels of the company are low, you will have a problem financing the growth of the balance sheet as money is needed to buy stocks and pay suppliers.

Other Investments

Another place to look for discrepancies is in investments with fixed assets (machinery). The seller may have delayed these investments so that there is more cash in the company, of which he can take for themselves before the sale. This impacts you because you will be the one who has to replace the asset that has been taken. Therefore, if you see that in the last year there was less investment in fixed assets than in previous years, look for why.

Perhaps the machinery is more obsolete than the amortization tables show and it is urgent to replace it to remain competitive. You can find yourself buying the company thinking that you do not have to invest for three years and, the day after being announced as the new owner, discover that you need to urgently make a purchase of machinery to compete.

Do not stay rely on the document presented with the results of the due diligence, review every aspect with the team responsible for analysing the company and ask them about each individual area; the toad may be hidden in one of the pages of the document and go unnoticed if the auditors do not explain it in detail.

Look for tracks that sound strange, try to find inconsistencies even if they are small and then pull the thread. All the time that you dedicate to this will help you to better understand the company and, sometimes, to avoid disappointment.

You should also investigate other issues that do not appear on the balance sheet: lawsuits against the company, contracts, credit to customers, agreements with employees for payment in undeclared money or commitments of future variable salary, etc.

If the facilities belong to the partners, look carefully at the lease paid by the company. Make sure that the results shown to you regarding rent are not represented well below the market value, which has the capacity to reduce cost levels and artificially increase the buying cost of the company.

All these inquiries that have been mentioned can be decisive for the future of a company, and it is possible that you cannot carry out a certain type of analysis without the help of an expert. If you need a guide and a reliable team with which to carry out this phase of buying a company, do not hesitate to contact us!

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Buying a business: the due diligence

Once the indicative offer has been placed and the letter of intent has been signed, the next step is to validate that everything that has been said is true and that there are no hidden liabilities. Surprises are not appreciated in business, and especially in M&A when they can cost business owners millions of dollars. So to prevent these surprises from arising, due diligence has to be conducted before buying a business.

What is the due diligence in the buying process of a business?

As stated above, due diligence is an analysis that the buyer does to verify that what we have said is true. The buyer´s objective is to verify that what they are buying is what they are receiving. This is simply because after acquiring the company, both its advantages and problems will become those of the buyer.

Many inexperienced entrepreneurs tend to easily accept the first option they find and will look for a shortcut with the due diligence phase because they want to close the deal as fast as possible. This may happen because they have been looking for a company for a long time and are weary of negotiating: and above all, they would not want to start the whole process all over again. However, the due diligence analysis requires calm and objective actions, conducted through a thorough and rigorous revision. It usually takes between four to eight weeks.

In other cases, the seller will hold back from sharing all the information with the owner, or the owner may also be afraid to ask for it. Given the complexity and the resources needed on these corporate transactions, it is important to explain all the negative aspects of the business at the starting point as well. By not wishing to harm the relationship with the potential seller, the buyer could leave important matters uninspected. The consequences could be detrimental. If after due diligence the buyer discovers that the reality is different to what was negotiated, it is possible that he won’t even make another offer. He will simply stop the process leaving a bitter taste in everyone’s mouth due to the time and effort wasted.

The results of the due diligence can be an important tool for verifying if the offered price is adequate and the buyer often uses the results as a negotiating tool for price and contract terms. Sometimes, the seller isn’t aware of his own problems until the buyer discovers them in the due diligence.

Main aspects to analyze in the due diligence

In due diligence, there are three areas that must be analyzed: the business, its finances and its contracts.

The following aspects, within these three areas, should be evaluated: the history of the company, its transactions, products and services, the market and competitive position, its clients, the quality of both directors and employees, the established compensation system, competitors, facilities and machinery, stocks, financial statements, the production, planning and control systems, marketing, internal reporting, technology, environmental issues, its legal situation, social security, future prospects, business model, insurance, patents, brands, and debt.

The buyer must prioritize the information that is most relevant for him since the seller usually provides limited information in the due diligence process. Besides, his energy and documentation delivery will slow down as the process develops.

Due diligence provides four types of information:

Key facts needed to decide whether to buy a company or not
The price range
Terms and conditions of the sale agreement
Opportunities to improve the company

There are certain findings that can cause a rupture between the buyer and seller. Some outcomes create an insurmountable difference between the expectations of the buyer and the seller. Other results reveal very high risks for the buyer.

Thus, the operation is usually broken when (1) the financial picture after the due diligence is very different from what the seller said, (2) it is discovered that the perspectives of the companies are bad, (3) there are high contingencies, (4) the company depends too much on the seller, or (5) the company requires strong investments to be able to stay or go back.

Lastly, it is advisable to interview former employees before buying the company, as they may reveal other issues which have not yet been exposed.

Buying a business is a long and arduous process, accompanied by intense emotions. The advisors that have participated in numerous M&A transactions know it is a matter of perseverance and patience. Finding creative formulas also accelerates the process until the objective is fulfilled. If you are looking for a business to reinforce yours, do not hesitate to contact our team of experienced advisors.

Buying a Business: the Indicative Offer

You already have identified the best business to buy, started the acquisition process and met the seller. Now, if you are interested in learning more about the company you want to buy, it is time for you to make a move and present an indicative offer.

Advantages

When writing an indicative offer, the most important advantage you have is that there’s no juridical implication.

Moreover, the indicative offer shows the buyer intentions and what the seller can expect from him. The seller needs to get the indicative offer to decide if he wants to start the negotiation and understand if there are good chances to close the deal.

For buyers, the indicative offer also represents a great way to show that they are reliable.

Content

When writing the indicative offer, you are indicating an approximate price range, whether you are going to acquire the company buying shares o paying full price, and when you would like to sign the Letter of Intent. It will also help you to prepare a calendar with the steps you need to take to close the transaction. At the same time, it could be a vague document, because its goal is writing a first proposal to start the negotiation process.

Many business owners aiming the sell their business told us they were really impressed when they received the indicative offer, especially because it gave them a great motivation to start the negotiation business. Business owners usually sell their company once in a lifetime and buyers have to pay attention to details and make sellers feel important.

Indicative offers could also have an unexpected impact on business owners that weren’t interested in selling their business yet. If you are interested in buying a company and you are not sure whether it is on sale or not, think about it!

The process of buying a business is a long one, in which there are moments of intense emotions, of breakdowns,of crisis, in which it seems that the operation has reached a total impasse. As advisors who have taken part in numerous operations, we know that it is a question of tenacity, of not giving up, of looking for creative formulas which resuscitate the operation time after time until we achieve our goals. If you are looking for a company to strengthen your competitive position, don’t hesitate to contact us!

CONTACT OUR TEAM

4 things to evaluate the best business to buy

4 ways to evaluate the best business to buy

There may be a lot of opportunities around you, but if it involves as much investment as does the purchase of a company, it is important to judge the opportunity to make sure it is worth your time and money. Here are four ways you should consider to evaluate the best business to buy.

Quality of the source of the business to buy

The origin of the opportunity will serve as an indication of whether the opportunity is a true one.

Has it come to you through an investment bank or through an unknown intermediary? In the latter case, be more cautious. Is the seller paying an advisor? If so, it means that he or she is truly interested in selling.

Is the sale process formal? Did they make you sign a confidentiality agreement? Is there a sale memorandum?

This information is very relevant because in many occasions, the owner is only trying to test the market to see if there is interest for his or her company or to see what its true value is. In other cases, the operation may come to you through an intermediary but does not know if the owner truly wants to sell.

Are all shareholders selling?

Often, after conducting an in-depth research you discover that the seller is only a minor shareholder that only has 15% and is looking for a buyer to “get out of there.” The usual in these cases is for the major shareholders to buy them. It usually makes little sense to replace the minority shareholder’s problems and pay money for it.

In other occasions, those who sell are major shareholders but the minorities have the right to abort your operation if they are not consulted in the process.

It could happen that a minority shareholder wants to sell, and in this case, it is important to be creative and design formulas that allow you to close the operation. This usually involves a more complicated operation and the likelihood of failure is very high.

Quality of advisors when looking for the best business to buy

If the advising team that surrounds the seller does not have experience in this type of processes (this happens quite often), it is highly likely that the operation is ruined or the execution becomes more difficult. Therefore, you should look at the type of advisors and lawyers that the seller has before embarking on a purchase mandate.

You can tell them that you are willing to study the operation given that the work with corporate finance advisors and lawyers with given experience in the buying and selling of companies.

If their lawyer is a friend that specializes in family law and he or she is helping them with the process (the lawyer could be the first in not selling so that he or she is not left without a client), it may not be a good idea to become involved with a process that has a high likelihood of failure. Without a doubt, the higher the quality of advisors, the higher the possibility of a successful operation.

Is it really the type of company that you are looking for?

When evaluating the best business to buy, you have to clarify whether the company is in a development phase that interests you: start-up, growth, or maturity. Do you really possess the tools you need to compete in this sector?

Is the company part of the sector and type of business that you have the capacity and real experience to manage?

Is the company in a geographic zone that is accessible and close to your location (two hours maximum by car), and in a good geographical zone to successfully develop the business?

You should be sure to reflect on all these things before embarking on a new purchase.

This article was written by Enrique Quemada, ONEtoONE President.

5 places to find the right company to buy

Once you have made the decision to buy, it may be hard to find a company for the purchase. The first thing to do is to get the word out – in your surroundings and among the key actors in the world of mergers and acquisitions. Then, look in these places and, more than likely, you will find the best buy for you:

1. Gather information and ask around

First of all, get to know the industry that interests you, contact the professional association of the sector, speak with its leader and show him or her your interest, ask them to let you know if they hear of any company for sale.

2. Directly contact business owners

Another alternative is directly contacting the owners of the companies that interest you. You will be pleasantly surprised. Over the years, I have called many business owners in name of clients who were interested in buying them and these calls have always been well-received. In fact, some owners have shown great interest. Many business owners love to hear that you want to buy their company. They feel flattered and are willing to sell.

3. Use the internet

Another way is to put an ad on the internet, on corporate buying and selling websites. In these websites, there are a lot of ads for selling but very few for buying. This means that your ad will stand out and will provide you with a lot of leads. It is much better to have companies come to you than for you to go to them. This will increase your negotiation power.

YOU MIGHT ALSO BE INTERESTED IN, “6 STEPS TO IDENTIFY THE IDEAL SECTOR AND COMPANY TO BUY.”

4. M&A banks

Of course, it is important to make public your desire to buy a company. Head to M&A banks. There are not that many (ONEtoONE Capital Partners is one of them) and are easy to find on the internet. However, you should show them real interest in buying because bankers like those who show true interest and will not want to waste time with those who are not serious. The advantage of contacting one of these entities is that they have sale mandates and the seller has paid them so that they make a sale notebook and create documentation about the company, meaning that they will be able to give you a lot of information.

5. Lending entities, such as banks and venture capital firms

Risk entities, such as lending banks or venture capital firms, are also an amazing source. They know the companies for which the business owners are close to retirement or where they are overwhelmed and are looking to find substitutes to take on the company leadership.

If you are looking for companies in crisis, ask around at these banks. They have many of them as clients and will be happy to look for an alternative leadership.

The aggressive debt of companies and the fall of revenues and EBITDAs (earnings before interest, taxes, depreciation, and amortization) provoke many companies to have difficulties when facing the debt. In these circumstances, banks find that these companies are the most willing for a change in leadership.

The banks are aware that if a company is insolvent, it will go into bankruptcy soon and they will lose most of what they have loaned the company.

Therefore, to avoid this situation, financial entities are taking control of the situation and are forcing business owners to oblige them to sell their company with the goal of recuperating most of the amount loaned.

Speak with venture capital firms that are focused on your sector. Most will have sectorial preferences. You can find them at www.webcapitalriesgo.com.

Other tips

If you are looking for small companies, you can speak with the Chamber of Commerce in your area or with a broker.

Other actors that can show you companies are law firms, financial offices, or auditors.

Do not forget about head hunters, those to whom financial investors hire to find an executive for their company. In these cases, you are the last in coming to the operation and, even though you can get a percentage of capital, your negotiation power is much less.

If may seem like a lot of work having to do a search, but as the saying goes, “no pain, no gain.” Behind this search could be an opportunity that cannot be matched. If you do not like your current situation, do not conform; create your own destiny.

Do not overlook the company you are working for at the moment. You may be in an ideal buying opportunity, but you did not realize it. Appearances fool and maybe, while you look for an opportunity outside, owners of the company where you work are secretly looking for a buyer. You will not be the first executive to whom it happens.

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

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.

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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.

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.

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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.