The road to acquisition entrepreneurship is hardly quick or easy. The hunt for a good buy can easily take as much as two years, during which time hundreds of prospectuses might cross your desk. The key is knowing how to differentiate between true and fool’s gold. And that takes patience and a little know-how — often more effort than many first-time acquisition entrepreneurs are anticipating.
Once you’ve thought through the many factors to consider when deciding to take the leap to business ownership, where do you start?
The Deal With Online Marketplaces
The internet might seem like the obvious answer, but if you’re not careful, you could end up spinning your wheels, wasting tons of time perusing vast numbers of bad options.
True, there are numerous businesses listed for sale on online marketplaces. LoopNet claims to include 500,000 commercial listings in the U.S.; BizBuySell has more than 45,000; BusinessForSale.com has more than 20,000 in the U.S.; and BusinessBroker.net has more than 26,000 in the U.S.
On the surface, those are exciting numbers. But reality check: Looking to buy a business on an online marketplace is equivalent to looking for a job on Monster or CareerBuilder. Those sites list thousands of opportunities, but have you ever actually met anyone who got a job by using them? I certainly haven’t.
Online marketplaces attract the lowest common denominator. According to a report by BizBuySell, 80% of businesses on the online marketplace never get sold. Perhaps the product or service isn’t relevant anymore or wasn’t viable or high-quality to begin with. Perhaps the founders banked on a trend that turned out to be fleeting — think Beanie Baby entrepreneurs of the late 1990s.
Whatever the reason, if an available business won’t sell, it will definitely make it onto an online marketplace. This does not mean every business listed on an online marketplace is junk (i.e., a business that won’t eventually sell) — but this is where all the junk ends up. The majority has already been passed over by the inner network of the intermediary and its team.
Beyond attracting failing businesses, online marketplaces also don’t work because they’re missing the human element.
It’s impossible to get insight into the nuances of what you’re really looking at. Even though you’re looking at a seemingly infinite volume of businesses for sale, you’ll be shopping blind. You simply can’t approach buying a business the same way you would shopping for a T-shirt online. (By the way, consumers return almost one-third of everything bought online.)
Consider the data behind Axial, perhaps the single most successful online network for the private middle market. By the end of 2017, Axial claimed $25 billion in closed transactions. Impressive, right? Look a little closer. My conversations with mergers and acquisitions advisors revealed Axial isn’t helpful beyond amplifying their networks in the industry. True, this can lead to more deals off the platform later. But when you look closer into the data behind the $25 billion in closed transactions, you’ll find that it was across 2,000 transactions, despite an enormous 2.1 million connections. This means less than 0.1% of all connections resulted in a closed deal over an eight-year span.
Of course, not all online marketplaces are a complete waste of time. I work as an advisor with Quiet Light Brokerage, which focuses on high-quality businesses and has thoughtfully built a list of private buyers over 12 years. I first became a raving fan because I felt the site transcended the geographic restrictions of most buyers while also focusing on businesses that were extremely quantifiable and easily transferable. The team is made up of successful acquisition entrepreneurs who conduct extensive reviews of each company, creating a detailed memorandum — often approaching 50 pages — that provides a wealth of information. Quiet Light Brokerage has been extremely successful in creating a more efficient, private marketplace for transactions of online businesses.
Human Networks Power Acquisition Entrepreneurship
Rather than rely on online marketplaces, a much better tactic for buyers is to get upstream and generate your own deal flow. For that, you need the human network, made up of mentors to guide you through the opaque and inefficient private markets.
When I began my journey as an acquisition entrepreneur in 2004, I quickly discovered that the “private” in private capital markets was literal. I couldn’t find any information on companies or comparable sales, and industry data was heavily slanted to the publicly traded companies where information is readily available and regulated.
The intense regulation that comes with being a public company is one reason many choose to stay private. Although going public brings in a lot of capital, it also means costly and time-consuming reporting and third-party auditing. Those glossy annual reports come at a steep cost! Instead, private companies can keep their business plans and finances veiled, which creates some strategic advantage. This is also precisely why you need to build up your human network, so advisors will shop listings directly to you and you can unlock access to that private data.
In addition to being opaque, the private market is fragmented. As I began my outreach, I discovered that after a few meetings with advisors, I knew more about the listings of other brokers than they did about each other. This increased as my geographic scope expanded. Brokers’ abilities to evaluate listings can vary, with some bringing an academic Wall Street style to the table and others with a lot of hustle but lacking in sophisticated analytical chops — another reason to build a deep, diverse network.
A Road Map to Acquisition
In “Alice in Wonderland,” the Cheshire Cat tells Alice that if she doesn’t know her destination, it doesn’t much matter which direction she travels. Finding a business to buy is similar — if you haven’t given considerable thought to what you are looking for, you’re not going to find it on the menu of available companies, and your search will be plagued with constant uncertainty. Even the best advisor in the world won’t be able to help you, either.
Get clear on your goals by formulating a target statement that takes into account the acquisition profile you’re looking for, your skill set, and the desired value-building opportunity. Then, begin your outreach with the goal of generating deal flow.
Buyers with significant financial backing might choose to do outreach directly to business owners via mail in an effort to generate interest. In my experience, this has mixed results, largely because of the absence of a broker to rudder the valuation, negotiation, and process.
I’ve found greater success going through advisors, intermediaries, brokers, and investment bankers. Each will have an email list to distribute to subscribers. Your goal is to get on as many of these as possible so your inbox begins to receive high-quality listings as soon as they come on the market.
Finding advisors is relatively easy.
Start by conducting a Google search for business brokers, investment bankers, and mergers and acquisitions advisory firms in your geographic area. Make a list of names, and use social media to see whether you have any connections. If so, ask for an invite via email. If not, pick up the phone and request a meeting. Even a 15-minute meeting will help you get qualified and on their list — face to face is best.
When meeting with advisors, have your personal financial statement, résumé, and target statement at hand, as well as a list of questions to ask to ascertain their qualifications. You’ll want to know how long they’ve been in business (shoot for a few years at minimum) and whether they are certified — a Certified Business Intermediary is ideal. Ask whether they work as brokers full- or part-time. Full-time is best, as the advisor will be more readily available should you need to get in touch. If your goal includes property, find out whether the advisors have a real estate license.
When you begin to review opportunities, you’ll notice that you are given very little information without signing a nondisclosure agreement. This is required for obvious reasons. When a private company is exploring a sale, confidential information will be shared, and there is a risk that customers, competitors, employees, or anyone else will find out. The impact can be detrimental. Be sure to respect the information you’re granted access to.
Once you find something that looks attractive, try to home in on the following four areas:
1. What is the inherent value?
Really ask yourself what you’re buying because value doesn’t just mean cash flow. It can also come in the form of awesome organic search rankings, a glut of hard assets, or a reliable, established customer base.
In other words, value can be most any asset that would be hard to reproduce if you started from zero. Warren Buffett refers to this as the “moat” of the business, or the unique factor that gives it competitive advantage against both existing and new entrants. A wide and sustainable moat will deliver the greatest rewards.
However, if the business lacks a true moat, that doesn’t mean it’s a bad buy. It just means its value might be more subtle. Either way, you’ll want to know exactly where the value lies before moving forward.
2. What is the opportunity profile?
Identifying the opportunity profile of the business will help you understand the shortest path to building value post-purchase. There are four ways to drive value, which I refer to as the “acquisition entrepreneur matrix.” They include:
- Eternally profitable: This type of business is all about stability and will have steady revenues and slow growth with a dependable customer base. This option carries the least amount of risk but also doesn’t have as much potential for growth. It will also come with a steep price tag.
- Turnaround: This opportunity is for entrepreneurs who want a challenging project recovering a distressed company in bad financial shape. It will come at a discount, but you’ll have to invest a lot of work to improve revenues, not to mention the hard tasks such as staff cuts that will probably be required.
- High-growth: These companies are profitable with a high-demand product and founders who are ready to get out. This won’t come cheap — you’ll pay for the healthy financials and growth potential. You might be wondering why anyone would want to get rid of a high-growth business. Basically, growth isn’t cheap. Companies require a lot of cash to meet demand, and some owners have trouble keeping up. If you acquire a high-growth company, the high demand doesn’t mean zero risk, as you’ll probably be taking on a hefty debt.
- Platform: A platform opportunity will allow you to achieve growth by relying on your particular brand of expertise. The business will have strengths and weaknesses, both of which you’ll be able to complement with your skill set. For instance, if you’re a whiz at public relations and the company has limited market visibility, you might be able to hit growth-pay dirt.
3. What is the path to growth?
Every business has a clear path to growth, some easier to attain than others. Expanding a nationwide physical infrastructure? Not so easy. A dedicated B2B selling effort? Much more straightforward. Adding new products or launching a dedicated online marketing effort would be middle-of-the-road examples.
To discover the path to growth, you must first understand what’s driving value and what’s the core competency of the business or its employees. Then, ask yourself what it would take to double or triple its size. This is perhaps the most important question you’ll ask yourself before you commit to a purchase. Whatever the opportunity may be, you need clarity on your business plan moving forward.
4. Are you the right person to execute?
Once you understand the inherent value the business offers, its opportunity profile, and the clear path to growth, you’ll have a clear mental picture of what the business needs going forward and how it can become a growth platform for a driven entrepreneur — all while providing a margin of safety, a positive return on investment, and upside potential.
The final question to ask yourself is “What is the skill set needed to execute on this opportunity?” If your skill set matches what’s needed to take the business to the next level, you might have just found your acquisition.
While you won’t buy the first business you review and the search will take time, with clarity, conviction, and effort, you can achieve acquisition entrepreneurship in less than six months. Happy hunting!