Tag Archives: Buy side

STEPS TO PURCHASING A BUSINESS

Did a company for sale grab your attention? If you want to become an entrepreneur but feel like you do not have a base to do it, buying a company is a good option. Purchasing an existing company could be an opportunity to start a business without going through the process from scratch. As with everything, there are companies for sale that are not good buys. Therefore, there are professionals that accompany you in this journey and guide you in making the best decision.

Follow these steps to make sure you make the right purchase:

Step #1: Identify the industry you want to be in

The first step in an acquisition is defining the type of company that you are looking for. This begins with a broad decision on what industry you want to enter. You will have to investigate both the medium and long-term prospective of that sector, observe the competition, and pay attention to changes in laws and regulations. To really understand the service that the company offers, position yourself as a customer and experience it first-hand.

Step #2: Get in touch with the company for the acquisition

After a profound investigation, the next step is heading for the ideal company. While picking a company, it is important to have in mind a budget, size, location, annual income figure, and your possibilities for success. It should not offer you something you cannot handle. Therefore, counting on professionals is advised.

YOU MIGHT ALSO BE INTERESTED IN, “THE BUSINESS PLAN: THE PATHWAY TO BUY A COMPANY”.

Step #3: Start a negotiation

At this point, you already have a detailed image of the company and the industry. With this, you can begin the negotiations with the owners to come to the best deal possible for both parties. The first point of negotiation is the price – after performing a valuation. Then, you should formulate a plan for the rest of the process.

Step #4: Evaluate the company

The valuation stage in the purchase of a company is the most important to guarantee success. The assets sometimes make up the biggest part of any valuation. Depending on the company, this could be the value of the property and real estate or also the machinery and equipment. You should also not overlook the importance of the business volume, profitability, and current contracts.

Step #5: The purchase and sale agreement

The finalization of the purchase and sale contract marks the final stage of the acquisition. While both parties have already established a broad view of the purchase in general and non-legally binding terms, their purchase and sale agreement will impose legal obligations to both parties.

Step #6: The payment

There are various options to finance the purchase of a company, depending on the size and scale of the purchase. A large-size purchase (e.g. a multinational) could be a more complicated operation due to several factors. For a smaller-sized purchase, the most common payment method is net payment. The payment could come from private funds, investors, banks, other lending entities, etc. Sometimes, the actual owners may give up complete control of the company in the sale but only receive a percentage of the company value when sold – in exchange for a continued share of the company profits.

Conclusion

After these six steps, when the final documents are completed, contracts are signed, and payment agreement is official, the acquisition is complete. This process can be slow and take a lot of work; therefore, it is important to know that there are companies like ONEtoONE that can guide you and accompany you in the process.

YOU MIGHT ALSO BE INTERESTED IN, “THE STRATEGIC PLAN: THE KEY TO CREATING VALUE IN THE PURCHASE OF A COMPANY”.

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

Handeling an MBO: Buying a company as an executive

As an executive in a company, such as its manager or director, you might think that the owners of your company would want to sell it to a third party instead of to you. On the other hand, there are a series of reasons that make it more logical for them to choose you for an MBO (management buy-out).

“A bird in the hand is worth two in the bush.” – Spanish proverb

Why the business owner would rather sell to one of its executives (MBO)

The first reason is the confidentiality. This way, they do not publicize the sale of the company and can avoid unnecessary gossip from the competition. If an executive of the company is considering purchasing it, he or she will not play games because they know that their job is on the line.

On a different note, the executive knows what he or she is buying and will find less risk than an outsider. This will make the company more valuable to the executive (he or she is familiar with the company being bought so will discount less for risk).

Similarly, because the executive knows the company well, he or she will not have to do a very exhaustive due diligence, so the process could be much quicker.

When the buyer is that company’s executive, there is much less risk of the operation falling through due to misunderstandings because there tends to be knowledge and trust between the parties and will thus be able to find a way to reach an agreement. The business owner saves him or herself the arduous process of looking for, convincing, negotiating, and selling to an outsider.

The executive gives a guarantee of continuity for the company that outside buyers do not. The employees, suppliers, customers, and banks know the executive.

Therefore, even though the process is competitive, executives have more advantages because they better understand the value of the company and the maximum price that should be paid for it. The other potential buyers know this, and if there are business executives who are also contenders for the purchase, they tend to pull out from the process.

Managing the conflict

In an MBO, there is an inherent conflict since you are both the buyer and the manager/director.

The best way to deal with this problem is by being professional and working on the purchase outside of your business hours.

Another conflict is the price, your natural interest would be to buy it at the lowest price possible. However, you are taking a lot of risk; your job and the purchase are both on the line. Therefore, I recommend that you be careful not to let yourself be overtaken by greed, that you establish a fair price, and that you back it up with facts and data.

If you see any point of conflict, openly show it to the seller and create ways to find solutions. This way, you will have the confidence to find ways to fight the problems that may arise in the negotiations.

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

Your might also be interested in “THE BUSINESS PLAN: THE PATHWAY TO BUY A COMPANY”.

Buying a business with a financial partner

When buying a business, you are going to marry that financial partner, so you better do your homework when choosing one.

How to choose the right financial partner

If you choose the wrong financial partner, your life as an executive in that company could be hell. Therefore, the first thing that we recommend is analyzing several of them. There are more so many Private Equity firms and family offices (family-owned investment groups). Do not only focus on their economic capacity and initial chemistry. Study the operations that they have done previously, speak with the directors with whom they have worked, and ask them how they behave in good and bad times to determine what their relationship style is. Do not make a wild guess. Choose four or five that fit with the requirements that you look for and concentrate on negotiating with them. On the private equity websites, you should be able to see the sectors and the market sizes they invest in and what companies they have invested in previously.

Trustin the financial partner is fundamental. Dedicate time to study the investment team, analyze their culture, their philosophy, and look to see if they are pressured, anxious, and understand the day-to-day realities of the companies or if they are just financial analysts who look at Excel sheets. In your conversations with them, do not leave room for ambiguity. Get concrete answers for your questions: Who will lead the communication with you? How will they supervise you? What happens if you do not comply with the business plan? What is their exit plan? Are they going to let you run the company or will they be involved? Are they harsh with the managers or do they know how to reward effort? Check with the other companies they have invested to see if their answers are honest. If there are things that do not make sense or do not align with you, do not go with them; find other investors. There are a lot of private equity firms and you will have to be with the one you marry for the rest of your corporate life. As in all sectors, there are great firms and not-so-great ones. Try to find the former and negotiate with them. Once you have located them, try to make them compete with others for the deal. If the company and the business plan are good, you will achieve it.

If you want to reach a favorable deal for you, competition is key. When you negotiate only with one party, they will have all the power and you will be the weak link. When you reach this point, it is important to already have established a great partner agreement. The more work you put into the operation, the better. If you present the operation to a private equity firm without preparation, you will have much less power. If you have a comprehensive team and present a very clear strategy, you will be able to obtain more percentage of the capital because you will create more value for the operation. Do your homework before looking for a partner.

How to reach a favorable deal with a private equity firm

In respect to Private Equity, credibility is the fundamental factor. If you want to be successful with them, prepare yourself very well and it will all be very coherent. Do the math – the balance predictions, various accounts, and the expected profitability for you and the financial investor. Only this way can you show that everything makes sense. It will also help you understand the opportunity that you have in front of you and if it is worth it to go on that journey.

To do this, it is important to put your trust in Mergers & Acquisitions advisors so that they can help you locate the venture capital entity that is the most appropriate for you and to create that competition. They will also help you structure the operation. You can prepare your agreement so that the financial investor pays the advisor fees for having introduced you to them.

Financial investors and MBOs

Financial investors are very attracted to management buyout operations (MBOs) for the following reasons:

-They minimize risk. Directors already know the company and the problems that it has. There is less risk of surprises

-Venture capital wants quick profitability, in four or five years. If they put in new management, with the time it takes for them to familiarize themselves with the company, they have already lost a year, which is very precious time for the financial investor

-The director knows what he or she is doing. He or she knows where the management errors were made and where the opportunities lie

-Directors take a gamble investing their money in their business, which will make sure they are aligned with the management and the investor maximizes profitability

-They already have a relationship with the employees. They will be accepted since they are already in charge

This article was written by Enrique Quemada – ONEtoONE President

Your might also be interested in “THE BUSINESS PLAN: THE PATHWAY TO BUY A COMPANY”.

THE BUSINESS PLAN: THE PATHWAY TO BUY A COMPANY

“Do that which you fear to do, and the fear will die.”- Emerson

The business plan consists of using numbers to determine how you are going to get where you want to get, what measures you will take, how much they will cost, and what economic results they will have. It is a natural extension of the strategic plan. In the long run, it will also help you see if you are advancing in the right path.

Why could the business be considered the pathway to the purchase of a company?

The business plan is the layout and budget; it details how you are going to assign the resources, how much each project will cost, and what objectives you will establish. Therefore, it should include a financial model. It must build a bridge between the past and the future of the company.

It has to do with a fundamental element because you may not only require money to purchase a company but also to make the necessary changes so that the purchase is successful.

This plan incorporates the tactics that you will implement to reach your strategic vision and the investments to carry out to achieve it. You might not need investment but rather an improved focus and assignment of costs. If you do it well, you will know the amount of money you really need and when you need it.

If you want to purchase the affiliate of a multinational, maybe the cost structure of the corporate services pressure profitability too much or there is too much bureaucracy and it dampens decision-making and commercial effectiveness. It could also be that the corporate strategy is not a good fit for the country. If you are aware of this, you will be able to show a financial investor that the profitability could grow much more if the company breaks from the corporate mold.

If the seller is a businessman and you see that it does not function with the same force as it did a few years ago, that it has slowed down, that the costs are too high, that corporate energy is lacking, that there is bad circulation of money, and that the money is lost in the details, you might see that there is the possibility to create a lot of value with a more aggressive and professional management. However, you will have to show it.

These are the messages that you will transfer to a financial partner so that he or she invests in the project alongside you, buying a company for the value that it creates and later managing it to create even more value.

How you transmit the messages of the business plan will be decisive. Since you will not be investing much money yourself, your value will be in the credibility of the documentation that you prepare (the proposed operation and the strategy to increase profitability). If your credibility is of high quality, you will find investors and they will put a price to your idea. If not, you will not have an operation to begin with.

If you want to have a financial investor, you should incorporate an exit strategy in the business plan. Venture capitalists will dedicate 50% of their time to study if it is worth investing in the company and the other 50% to analyze how they could leave in four or five years. If you want to attract investors, give them something to think about.

Be careful with your projections. If they are too low, they will not be attractive since financial investors look for profitability above 20%. If they are too high, they should be well-supported because, if not, you will lose credibility.

It is true that the projections you make will benchmark you. Investors will ask that you comply with them, and if you do no reach them, they will penalize you. Therefore, I recommend that you be conservative and leave room for error.

Venture capitalists invest in only one or two companies for every 100 offers that they receive. Thus, it is very important that your business plan be of high quality if you want to get past the test. You could ruin your chances with a bad business plan.

If your business plan is presented by an investment bank, they will be much more interested in it, and it will have the structure that they are looking for. It is worth it getting help from professional, specialized advisors.

The layout of a basic business plan

Below, I explain the basic layout of a business plan:

–Executive summary: two or three pages that summarize the opportunity, numbers, price, company, sector, management team, growth strategy, expected profitability, and exit strategy. The investor might only devote five minutes to it, and if, in this time period, you have not gotten his or her attention, your document will go straight to the trash. Therefore, the quality of the executive summary is fundamental; potential investors might not read more than that.

–Company: show its products, organizational chart, facilities, production and sale methods, clients and suppliers, competitive advantages, and its position in the industry.

–Sector: clarify your sector and subsector in which you operate, its size, actual and projected growth, margins, competitive landscape, and tendencies.

–SWOT: show the strengths, weaknesses, opportunities, and threats of both the sector and the company.

–Competitors: how many players exist, who are the most important five actors, who competes directly with your company, what are your competitive strategies, your margins, and your balance structure. Also mention your potential competitors.

–Strategic opportunity: describe the strategy that you will develop to take advantage of the competitive opportunity, what advantages the company has and the actions that they will take, and what the expected results are.

–Management team: the background of the executives and why they are the ideal people to lead the company according to a new strategy that will provide more margins and profitability.

–Numbers: show the numerical results of the previous three years and the projections for the results that you will have under your management in the following three scenarios: optimistic, realistic, and pessimistic. Explain how you will invest the additional capital.

–Profitability: explain the expected profitability under each of the scenarios and the risks of not achieving them.

–Exit strategy: some options for the investor consist of growing the company through acquisitions or selling it later to a foreign company, going public, or selling to a larger venture capital firm.

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

Your might also be interested in “THE STRATEGIC PLAN: THE KEY TO CREATING VALUE IN THE PURCHASE OF A COMPANY”.

Investment Opportunities in Russia’s Growing Agriculture Sector

As the world’s population and demand for food continues to sharply increase, a major looming question for policymakers, investors and communities is, “Where will increased food supply come from?” While additional food production will depend on various factors, including government policies, private sector investment and technology, one country that will likely play an increasingly important role in feeding the world is Russia.

Since 2000, Russia’s grain exports have rapidly grown and in 2017 Russia surpassed the United States to become the world’s largest exporter of wheat. In addition to its current agricultural production capabilities, climate change may make many millions of additional acres in northern Russia available for farming. This, combined with planned expansions of Russia’s export infrastructure, broadening export markets and a planned increase of fertilizer use, could increasingly place it in a position of global agriculture sector leadership.

This article provides a brief overview of the Russian agriculture sector, how it has been impacted by economic sanctions in the wake of Russia’s annexation of Crimea and its great potential going forward. In addition to having major world food supply significance, this will create significant opportunities for global agriculture sector investors.

A Snapshot of Russia’s Agriculture Sector

The largest country in the world, Russia has approximately 1,282,500 square kilometers of arable land. While the key drivers of Russia’s economy are oil and natural gas exports, the agriculture sector is also important and currently comprises approximately 4.7% of Russia’s GDP.

Russia’s most important crops are grains, sunflower oil and corn. It is one of the world’s top producers of wheat, the world’s largest producer of sunflower oil and an important producer of corn. In addition to grains and vegetable oils, Russia also produces and exports many other food products such as barley, fish, meat, dairy products, fruit and nuts.

Russian food products are exported around the world. Russian grains, for example, are exported to over 120 countries. The main export destinations for Russian grains are North Africa, the Middle East and the South Caucasas. The main export destinations for Russian sunflower oil are the CIS countries, China, Turkey, Egypt and Iran.

The Macroeconomic, Geopolitical and Climate Context

Since 2014 Russia’s agriculture sector has been impacted by a number of major macroeconomic and geopolitical events. The first event was the collapse of the price of petroleum, Russia’s most important export. Between 2014 and 2018 the price of oil fell from US $103 a barrel to a low of US $39 a barrel and the price is currently US $61 a barrel.

This has had several important consequences for Russia, including pushing the Russian economy into recession, causing a sharp fall in the value of the rouble and a causing a drop in Russia’s foreign currency reserves. The rouble’s devaluation caused the price of imports to sharply increase which in turn created strong upward inflationary pressure. In 2015, the inflation rate in Russia was over 15%, its highest level in a decade.

A geopolitical development that has had an important impact on Russia’s agriculture sector is the economic sanctions against Russia. Following Russia’s annexation of Crimea, various countries implemented several rounds of economic sanctions against Russia. In response to these sanctions, the Russian government banned food imports from several countries and areas, including the United States, Canada and the European Union. Following this, the structure of Russian consumer food consumption significantly changed. Between 2014 and 2018, the percentage of food consumption that was based on imports fell from approximately 37% to approximately 22%.

A third set of events, whose cause and significance still remain difficult to analyze precisely, are temperature increases and extreme weather events. What is clear is that due to several years of highly favorable weather conditions Russian grain production has sharply increased. In 2017 Russia become the largest exporter of wheat in the world, exporting nearly 28 million tons. It is expected that the 2017-2018 harvesting season will produce about 133 million tons of grains, of which approximately 45 million tons will be exported. It is expected that about 32 million tons of these exports will be comprised of wheat.

Agriculture Sector Potential and Obstacles

The Russian agriculture sector has massive potential going forward for several reasons, one of which is rising global temperatures that may melt snow currently covering massive areas of potential farmland. According to one report, global warming could create an additional 140 million arable acres of land in Russia. This, combined with an additional use of fertilizers and technological developments, could exponentially increase Russian agricultural production capability.

Additional production capacity has the ability to be matched with new markets. Vladimir Putin’s vision of a Greater Eurasian region and the possibility of great economic integration with China, a massive source of food demand, could significantly increase export market depth.
Russia faces, however, major challenges to building its agriculture sector. A major current challenge is its weakened economic condition due to low oil prices and the weak rouble. This has made it much more expensive to import needed agriculture machinery. Further, weakened central government finances have made it more difficult to support the agriculture sector with subsidies, a key component of Russia’s overall agriculture sector public policy.

Another major obstacle to Russian food export sector growth is infrastructure limitations. Russian traders have lost access to ports in the Ukraine, which has limited export capacities. Several upgrades to Russian ports and terminals are current being built or are planned, but it is unlikely that these improvements will have a major impact on grain export capabilities for at least a few years. One of these ports is a new grain facility that is planned to be built at the sea port of Zarubino, near the Russia-China border.

Russia’s great size also creates opportunities as well as challenges. While Russia is uniquely positioned to supply markets in Europe, Asia and the Middle East, due to its immense size and the fact that many places with great agriculture growth potential are in areas that are not highly populated, it will be a challenge to put in place, not only agricultural product storage and transport infrastructure, but also the communities required to support significant further agriculture sector development.

Investment Opportunities

The current and potential future economic and agriculture landscape in Russia creates many investment opportunities. These include:

-investing in farming companies that have production growth strategies

-investing in company or investment funds with agriculture-driven infrastructure strategies, including ports, roads and logistic centers

-investing in companies whose business models are based on agriculture sector inputs, including agriculture machinery, agriculture equipment and fertilizers

-investing in companies in the financial sector that can complement or increase existing agriculture sector financing sources

Conclusion

The already important Russian agriculture sector has the potential to grow significantly in the years to come. In addition to having major significance for global food supply, this will create many investment opportunities for global agriculture sector investors.

This article was written by Darin Bifani. The photo for this article was taken by Nitin Bhosale.

If you would like to discuss potential agriculture investment strategies in Russia or other parts of the world, please contact us!

Do you know what you are looking for when selling your company?

Do you know what you are looking for when buying a company?

You will find what you are looking for only if you know what it is that you are looking for.

When it is time to focus on what type of company would be the best fit for you, analyze your strengths, what sectors you have experience in, what type of clients have you developed a good network with, what geographical region you want to be in, and what type of business you feel the most comfortable in: manufacturing? Service? Retail? Wholesale?

The clearer you are in your search criteria, the more help you can get from others.

For example, let us assume that two directors come to see me. One of them explains to me that he is searching for companies that have a turnover of more than €10 million without giving me an explanation. However, the other says that he is looking for an graphic design company that has a turnover of more than €10 million because that is his specialty and that he has experience in leading various important groups in that sector. If an opportunity arises in the industry over €10 million, I will call the second client because he is a much more qualified candidate with many more possibilities of closing the deal since he is familiar with the sector and knows what he wants.

What geographical area interests you?

Even though it may seem counterintuitive, the more general you are, the more difficult it is for the consultors to think of you when the opportunity arises.

I remember a few directors who had worked in the construction sector who came to see me. They told me that they were interested in buying companies tat produced curtain walls. I discussed other opportunities with them but they discarded them; they had done a study and considered that the market would grow in this field and that the true opportunity for them was there. Since they were so specific in their demand, they were engrained in my memory and when an opportunity in that sector came up, I thought of them immediately.

Determine the characteristics of the ideal company

You should also clarify the turnover amount that interests you and the number of employees that would make you feel the most comfortable.

Determine if you want a company that needs restructuration and where no more funding is needed or one that is in good condition and would generate a steady flow of cash (i.e. a cash cow). Or perhaps, you are looking for one that is held hostage by its growth or one that has a lot of debt because you are an expert in negotiating with banks.

It could be that you are looking for a company that is involved in advertising or marketing because that is your strength, or you see yourself capable of generating better cash flow.

Whatever it may be, be clear on what it is that you are searching for. Once you have determined the most important elements of the company that you want, prioritize them.

I believe that experience in the industry is fundamental. The better you know a sector, the easier it will be for you to find windows of opportunity and the more difficult it would be for others to scam you.

Focus on what you can bring to the company

When you analyze a company, do not focus so much on what it does but rather on what you can do with it yourself. Does it have a reliable client base to which you can sell other products? Can the products that the company already produces have other uses by creating new markets? Do you have the capacity to take the company internationally? After that one, could you acquire more companies in the sector and that way create a relevant player in the sector?

Potential candidates

There are two types of clear candidates:

-The divestment of a division or small company that belong to a larger company: the larger company sells it because they no longer align with the strategy or because it has financial difficulties or because it has found a better opportunity and needs liquidity to finance it.

-The sale of private companies due to the retirement of the owner or conflict between the partners.

This article was written by Enrique Quemada, Chairman of ONEtoONE Corporate Finance Group. Book: ¿Puedo comprar una empresa? Yes, You Can!

If you are interested in learning more about buying a business, take a look at THE 10 MOST COMMON OBSTACLES WHEN BUYING A COMPANY.

8 Key Takeaways on Buying a Company

Last Monday, I had the pleasure of presenting a “buy your own” company workshop to the young entrepreneurs and enthusiasts of “Cercle Dynamique” in Brussels.

Just like you, some of those young men and women did while some did not have a background in economics, negotiation, or M&A. The idea was to create eight guidelines to focus on when looking to buy a company which are easily understandable for professionals as well as for complete newbies.

M&A is like marriage, you are bound for life with no option on a free divorce. Pick the right partner, and write stuff down. Here are the top 8 takeaways on buying a company:

1) Decide what you are looking for

Decide what you want in terms of location, size, industry, etc. Think about your budget as well – do you even have one?

2) Do your research

Visit companies close to home, check online, and know that there is NO harm in asking. Be careful: online, you will find one good opportunity for ten bad ones.

3) Consider getting help

Professionals will safeguard you from financial, legal, and emotional pitfalls. A sparring with a deal-making attitude will only help you move faster.

4) Understand the counterpart’s motivation

“For sale” does not mean that something is wrong; remember that. People have a variety of reasons to sell a company. What is of utmost importance is to understand why a seller sells. If you understand the motive of the counterpart, it will ease negotiations. The same goes for you – be clear about your buying motivation.

5) Complete Due Diligence

As your mom used to say: Do your homework! We mean, do the research. Team up with experts and do not leave anything up to change, be diligent.

6) Acquire the necessary funding

Funding knows many forms. You can use seller financing (vendor loan, etc.), business angels, venture capitalists, FFF’s (fools, friends and family) or just go knocking at the bank’s door. Whatever you decide to use in your financing cocktail do not overstretch and calculate an error margin.

7) Draft a sales agreement

Protect yourself with a waterproof Sales and Purchase Agreement. The SPA should define the scope of transaction, financial metrics, and formulas in detail. Once all is written down, make sure you understand and agree with every single word on that paper.

8) Keep your communication clear and transparent at all time

Communication is key in any business transaction, especially in one as important as a business purchase. Make sure all parties involved are constantly aware of what is going on.

Eager to learn more on valuation, the acquisition process and our conclusions? Check out the full slideshow here.

This article was written by Jeroen Maudens, Partner in our Brussels, Belgium office. If you would like to learn more about buying a company, take a look at the 10 MOST COMMON OBSTACLES WHEN BUYING A COMPANY.

The 10 Most Common Obstacles When Buying a Company

Confucius, the Chinese social philosopher whose teachings deeply influenced East Asian life and thought, once said, “If you make a mistake and do not correct it, this is called a mistake.” This cannot be further from the truth when it comes to buying a company. Here are 10 of the most common mistakes that become true obstacles when buying a company and how to avoid them:

1-Falling in love with a company

You should make sure to maintain your logical stance and keep your emotions at bay when it comes to the company in which you are interested. Do not let yourself be overtaken by the process and the desire to close the deal. To avoid this situation, it helps to study various possible acquisitions at the same time.

2-Looking for the perfect company

Machiavelli said that the best is the enemy of the good. All companies have flaws. The most important thing is to buy the one for which, with your capabilities, you can create more value than the old owners.

3-Accepting the asking price

Even though they may tell you that the price is firm and definitive, do not let yourself be influenced. Make counteroffers and start the negotiation dance. If they do not have another buyer that accepts the asking price, then the seller will enter your dance and continue to give in until you reach a satisfactory agreement for the both of you.

4-Not doing a comprehensive research on the company

Do not relax when it comes to the due diligence. The greatest flops in the company purchase process occur due to conducting only a superficial study of the information provided to you – for not asking enough questions or being satisfied with ambiguous or incomplete answers.

5-Having very little knowledge of the sector you are entering

Even though you may know the company well, you may be entering a sector in decay, with price wars, idle capacity, or a competitive dynamic that demands investments that you cannot handle. It is crucial to understand the industry that you are entering and its competitive forces.

6-Buying in a hurry

Avoid falling in the rush provoked by the seller and set your own pace in the process. Rush tends to reveal hidden motives. If you fall for the seller’s dynamic, you will not be able to negotiate or examine the company that you are buying properly.

7-Working with low-cost advisors

You get what you pay for. In a corporate operation, you should surround yourself with good advisors who are committed, analytical, demanding, and capable of detecting inconsistencies and defending your interests.

8-Not studying your partners

You may be so invested in studying the operation and finding funding to complete the deal that you spend less time analyzing the partners with whom you will make the purchase. They are just as important as the quality of the company that you are buying. One wrong partner could ruin a good acquisition.

9-Paying for the value that you will create yourself

Do not fall into the trap of paying for the potential that the seller says that the company will have if you fix this or that. All of this is value that you will create yourself. Pay the seller for what it is worth in that moment and leave all growth or improvements to create value for yourself.

10-Overlooking the ambiguities

When you reach a deal, make sure it is clear for how long the seller will stay, set in stone the payment methods, the responsibilities that you have to your partners, how your value creation will be remunerated, and close in a clear manner all aspects that may be relevant in your case. Do not leave anything open to interpretation because they will hurt you in the long run and make managing your new company difficult and could even ruin it.

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

Book: ¿Puedo comprar una empresa? Yes, You Can!

The Company, or the Business?

Are you thinking about buying that company that you love?

You have already decided and you have succeeded in advancing a few steps in the buying/selling process with the owner of the company. However, you are confronted with one of the most complicated problems of the operation: the seller’s understanding of the inequality that exists between the value of the shares and the debt accumulated.

The most efficient method, as a buyer, to cross this obstacle and achieve your objective is to present the business to the buyer, rather than the company. This represents for you the most advantageous alternative, because with an acquisition you avoid the debt that the company has with the banks and the responsibilities from past events. These would remain with the company and in the hands of the seller while you, as the buyer, avoid the risks.

You may arrive faced with a company with a lot of debt, but if you put a price only on the business, the seller will understand better that you are implying that his shares are not worth anything. Since you are buying the business free of debt, you, as a buyer, also have the option of requesting a bank loan to complete the purchase and pay the seller. The reasoning of the banker will be due to the fact that the business has no debt, you will be able to repay the financing with the funds generated by the same business.

As you can see, it is more convenient to buy the business rather than the company because you avoid many risks that could harm you later down the line. The question now is: will it also be the most convenient option for the seller? In reality, the seller is left with the debt and will have to pay more taxes. However, it is an option to be evaluated and one which ought to be explored at the time of purchase.

Mergers & Acquisitions, Compraventa de empresas

70% of the value of a company lies in finding the suitable buyer

Many business owners will sell to the first buyer without taking into account other potential buyers. When selling your business it is important to ask questions specific questions. Is this the best buyer? Is he the one that can pay the most for the business?
Business owners often rely on a lawyer or an auditor to look for potential buyers and investors without considering 70% of the deal value lies in finding the suitable buyer. Hence, it is essential to find a buyer which is the best strategic fit and will pay the most.
To maximize the value of your company, you or the advisors must engage in a rigorous search process to find buyers or investors who can deliver the highest synergies for your business and those with the strongest financial profile.
The best buyer is not always the most obvious buyer or the closest one. The best counterparty for your company could be for example from a different sector located on the other side of the world.
Once, in ONEtoONE Corporate Finance we advised during the sale of a company that generated ten million euros each year, the company had two million euros in operating income (EBITDA) and six million in financial debt. We found a buyer in the same country (Spain) who´s company earned double of what this other company earned, but had accumulated a lot of debt. He was interested in buying the company, offering to buy it for six times the operative income, which meant that discounting the company´s debt; the potential buyer was willing to pay six million euros for the selling company. As the potential buyer did not have enough capital up front to pay for the company, he offered to pay two million at the time of the sale and the rest of the four million over the upcoming years.

We found a German buyer with a turnover of double the selling´s company, but contrary to the Spanish buyer, he did have financial capability. Given that it was an international operation and the German company did not have a presence in Spain, he offered to pay a higher price for the company. He offered to pay seven times the operating income, (that after subtracting debt, it valued the company at eight million euros) and also planned to pay for the company in deferred payments, paying six million at the start and the rest of the two million one each year.

We attracted a third buyer, a Canadian company with a turnover of more than a billion euros, from which he earned a total of hundred million and with no debt. He saw many synergies with our client and he did not have any presence in Europe. He had a lot of interest in the company and offered to pay ten times the operating income of the company that after subtracting the debt, it left the buying price set at fourteen million.

If we were to have sold it to the Spanish firm, the firm could have come up with excuses not to repay the remaining four million euros and could have paid for the company two million. The Canadian company paid seven times more.

For your company, you should look for a buyer that gives you synergies and has a lot of cash at hand, without minding so much about its location. If the buyer can perceive the true added value for the company, they will be willing to pay more for your business.

Written by Enrique Quemada, president of ONEtoONE Corporate Finance.