Tag Archives: Buyer

How to Effectively Integrate Post Acquisition

The importance of conducting an effective integration process post-acquisition cannot be overstated. From ensuring that new company employees are comfortable within the workplace, to putting time into updating any internal company processes that need revising, the difference between a successful and failed merger can often be derived from the effort placed upon integration. The reality of the matter is that one of the greatest benefits of M&A is being able to incorporate your acquisition’s strengths into your own company’s processes, and in turn, you truly wouldn’t be doing your hard work justice if you failed to do so post transaction.

Practice What You Preach

One of the absolute fundamental facets of integration is training. In turn, it is crucial to approach this task with a great sense of practicality, and to not perceive it as a chore which simply requires a box to be ticked. Putting enough time into training any new employees, as well as older established employees, with all of the newly implemented processes and systems is essential to the future success of the merger. Resultantly, it is vital for the likes of top management and HR to implement a thoroughly thought out training process, which combines both group and individual tasks. In doing so, you are able to develop employees in a range of conditions and contexts, working with various issues from handling pressure situations to how to operate the company’s online portal. By applying such a comprehensive training program, it will go a long way in safeguarding the company’s continuity and progress in its newly merged and or expanded form.

Beyond the training phase, it is important that the principles, concepts and processes that have been taught are not neglected or forgotten about going forward. To ensure that all the time, money and effort placed upon the training does not go to waste, it is recommended that the company implements some solidified evaluation processes, whilst maintaining a high level of dialogue between HR, employees and top management regarding the new procedures. As a result, it becomes easier not only to track individual and department performances, but to also isolate the particular processes that are working well, which need improvement, and which need to be scrapped altogether. The fact is that not everything you try will work, and in turn, discovering that a certain practice doesn’t actually work for your company should be perceived as a positive thing. As such, you are now one step closer to ascertaining what is the right combination of processes and practices for your firm; categorically, understanding what doesn’t work for you can be just as valuable as understanding what does.

Patient Determination

In saying this, these things do take time and as has been alluded to previously in our article regarding the human aspect of M&A, it is important to maintain a decent level of patience. Without taking an absolute laissez-faire approach, it is important to remember that Rome wasn’t built in a day, just as your company post an acquisition won’t reach its ultimate heights instantaneously. It takes time for working relationships and processes to be developed and understood, for strategies to come to fruition and ultimately, for the newly merged company to reach its potential. With this in mind, it is important to not place too higher expectations on your company within the short term, after your acquisition. There is no problem with being bold and ambitious, but it is more about playing the long-game, in which you are not too discouraged if results don’t go exactly your way in the initial stages of the post-acquisition period.

Arguably the most important factor throughout this entire process is the upholding of a clear vision, which the entire firm has agreed upon and bought into. So long as your company has its sights set on a certain outcome, a collection of goals, or even a mentality that is able to unite the firm, then the company will solider on as a team; a collective that is determined to achieve success together. After all, it makes it so much easier for individuals and teams alike to achieve success when they know exactly what that success may look or feel like. Resultantly, a newly merged company’s vision for success and where it wants to be in the future should be the very foundation for what binds together each individual inside the firm. For nothing truly brings people together than a shared desire to achieve something big. Thus, from the moment a company signs off on an acquisition, their mind’s must turn to the all-important notion of integration. In fact, it has been suggested that “ideally, the acquiring company should begin planning the integration process even before the deal is announced.” In doing so, it becomes clear to top management as to how they can best go about implementing their new vision into the firm’s ethos as fast as possible.

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.

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

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 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”.