By: Jeffrey D. Jones, ASA, CBA, CBI
Every company, big or small, is concerned about growth. One of the more successful methods for growth of small to midsize companies is through acquisition of other existing companies. Expanding through acquisition has been a method frequently used by large closely-held and publicly-held companies. For many of the same reasons large companies buy existing businesses, small companies can often benefit from this practice. These reasons include:
- SYNERGISM WITH YOUR EXISTING BUSINESS
- OPEN NEW GEOGRAPHIC MARKETS FOR EXISTING PRODUCTS & SERVICES
- EXPANSION OF RELATED LINES OF BUSINESS
- EXPANSION OF NEW PRODUCT OR SERVICE LINES IN EXISTING MARKETS
Some of the advantages of acquiring an existing business include:
- Being able to review a company’s exiting track record as reflected in P & L’s, tax returns and other financial records can be very helpful in determining expansion plans. Growth potential can be measured based on actual experience rather than conjecture associated with start up ventures.
- The need for additional working capital is reduced due to the immediate cash flow being generated by the acquired company.
- Obtaining skilled employees who are familiar with the business operation and market a major benefit of any acquisition.
- Gaining established customers significantly reduces the time it would otherwise take to attract an adequate number of customers to support the overhead of a new operation.
- Obtaining existing licenses and permits can often reduce the time and cost of making application, gathering information and conforming to required regulations.
- Sources of capital to purchase existing businesses are more readily available than start up ventures. It is very
common for the owner of an acquired business to finance part of the purchase price. Banks and other financial
institutions prefer to loan money on existing operations that have a proven track record.
Buying an existing business can be a much faster and less expensive method for growth than starting or trying to expand through normal marketing methods.
WHERE TO FIND EXISTING BUSINESSES FOR SALE
Finding profitable businesses for sale at reasonable prices can be difficult. Often business owners have an inflated idea as to the value of their business due to articles in the Wall Street Journal describing the high multiples of earnings obtained by some of the publicly owned companies. The primary resources for finding profitable businesses for sale include the following:
- Ads in local newspapers, Wall Street Journal, and trade publications are a source of businesses for sale. Business owners or brokers representing owners describe their business offerings in these publications. By continuously following these publications, it may be possible to find a business that meets your criteria.
- Suppliers may be good sources of information regarding businesses for sale within the specified industries. Calling or writing to these suppliers and vendors and making them aware of your acquisition criteria may surface several prospective sellers that are not actively on the market, but would consider selling.
- Using direct mail to contact business owners whose businesses meet your general acquisition criteria can generate potential seller prospects. This method is frequently used by business brokers to seek out business owners who desire to sell. A short coming of this method is that you are contacting owners who may not be actively for sale and therefore, their motivation to sell may not be very strong which often results in unreasonable prices and terms of sale.
- Business Brokers can be a valuable resource of businesses for sale. Their full time job is to contact business
- owners and find those who are motivated to sell. Brokers have usually helped the business owner with determining a reasonable value for the business. Business brokers usually are aware of the financing resources and can help direct buyers to those sources best suited for specified business investments. The broker’s fee is typically paid by the seller and is usually based on the selling price.
- Searching the Internet is the newest method for finding businesses for sale. Most business brokers have web sites where they provide a list of businesses they have for sale. There are several national web sites where both brokers and business owners list their businesses for sale. These sites include: Bizquest.com, BizBuySell.com, and Businessesforsale.com. In addition to providing a list of businesses for sale, these sites also provide educational material regarding how to buy, sell, and value a business.
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Jeff is President of Advanced Business Brokers, Inc. 5500 Katy Fwy., Houston, TX 77007
713-401-9110, jdj@advancedbb.com www.advanced.com.
