Buyers: Capitalize on Unprecedented Business Acquisition Opportunities in 2021
Demand for business acquisitions is accelerating, rather than being dampened by COVID-19 for many sectors. This trajectory reflects a market driven by baby boomer demographics, low interest rates, available capital, opportunity seekers and business owners either well-positioned to profit or forced to exit. Market watchers look for both Main Street and M&A deal flow to soar in 2021.
On the supply side, all businesses have been impacted by COVID-19. Some have benefited from changes in consumer demand, while others have been challenged to modify their business model. However, the underlying demographics of business ownership have not changed. Aging baby boomers will be transferring their businesses, as time does not wait for pandemics to resolve.
On the demand side, there has been a shift from a predominant seller’s market to a buyer’s market. This usually refers to a situation in which supply exceeds demand, giving purchasers an advantage over sellers in price negotiation. But, in this case the advantage is driven by buyers feeling they can buy a business for a better value, low interest rates and unemployed workers not ready for retirement turning to business ownership to seek more control of their future.
In helping buyers/sellers through ownership transition process for over 18 years, we’ve identified some tips for buyers beginning their search.
#1: Find Opportunities Where Your Abilities, Skills and Resources Overlap Your Interests
Before you start searching for a business to buy, take the time to understand yourself, and where your abilities, skills and resources overlap with your interests. It is not productive to investigate any business that isn’t a good match. For example, consider which business categories and characteristics are not a good fit, and eliminate those businesses from your search.
Start by envisioning yourself as owner/manager of a company you might consider buying. What value do you bring to the business? Do you have sufficient resources to complete the purchase, with a cushion of additional resources for working capital and/or unexpected expenses? Would you be excited to tell your friends and family about your new venture? Being able to answer these types of questions will help narrow your search to only the businesses that would be a good fit for you.
#2: Be Prepared to Sell Yourself, Not Just to Be Sold
Once you have a complete inventory of your abilities, skills, resources and interests, you can sell yourself to business owners, which is something that so many buyers neglect. Most buyers approach the business acquisition process like angel investing. They ask, “Why should I invest in this business?” But business acquisition generally works the opposite of angel investing.
Most business sellers have tremendous pride in the business they created, and the value of their years of sweat equity, risk taking and the successful navigating of economic cycles. Instead of approaching the process with a “sell me on this opportunity, then I’ll invest my money” attitude, look at the process like you’re interviewing to be the CEO of the company.
Yes, money is a big part of getting a deal worked out. But sellers are also going to make decisions based on qualitative determinants. Is this buyer capable of continuing the legacy of my company? Can this buyer step into my shoes? Will this buyer take care of my employees and customers? So, make sure you do everything you can to instill confidence in you as the buyer and your ability to be a successful owner of the business.
#3: Consider the Big Picture First
Nine out of ten people who inquire about a business for sale opportunity never pull the trigger. Many do not consider the big picture issues first, e.g., is this business really a good fit for me? Do I bring value to this business? Does the location work or can the business be relocated? Do I have sufficient resources for the purchase, or down payment if financed, and working capital?
Upon signing an NDA, they instead dive into the financials, asking why a certain expense line changed from year-to-year. Financial details are an important determinant of price and terms to be offered, but focusing first on whether a business fits with a buyer’s hierarchy of needs will lead to a more successful outcome.
#4: Trust but Verify
Ninety-nine percent of owners selling their business do not have ill intent. They do not purposely try to hide material facts, nor are they trying to get out the door before a tidal wave crushes them. But, many buyers make these assumptions about sellers, and that distrust kills deals.
Business ownership has a life cycle. When starting-up a company, an owner might leverage all or most of their personal assets. They might forego significant income in early years to reinvest in growth. Over time, they might experience ups and downs of economic cycles. At the point that they reach a steady state, they might become complacent with the size of the business and risk adverse to reinvesting in potential growth opportunities. Age, health, divorce or just the desire to do something different may bring them to consider an exit at this time.
Most small business owners do not take the time to meticulously prepare their business for sale. They simply know that it is time retire, to enjoy the fruits of their labor and step back from the day-to-day operations. So, don’t assume ill intent by the seller if they are unable to deliver audited financials, a business plan or need time to prepare reports on customers, suppliers and competitors. Take the time to meet with owners and listen to direct answers to your questions…then verify with available data.
#5: Do Your Due Diligence, but Avoid Analysis Paralysis
Once buyers get to a letter of intent (LOI) which expresses a desire to purchase a business, some of them make one of two fatal mistakes: (1) they get lazy and don’t do a thorough job of due diligence; or (2) they become so fearful of making an error that they stall the acquisition process with overthinking and extended information requests. Due diligence should include financially, legally and operationally vetting the target company. But, there is a point at which a timely decision to proceed needs to be made.
There’s always going to be a leap of faith in a business acquisition, so it’s perfectly normal to feel some nerves. But when you do a thorough job of due diligence, you will be comfortable when it comes time to put pen to paper. Nervously excited? Sure, but not uncomfortable.
Where to Find Businesses for Sale
Be mindful of these tips and you’ll be way ahead of the curve compared to other business buyers. As you begin your search, regularly check out Touchstone Business Advisors’ website at www.touchstonebiz.com for business opportunities throughout Colorado and the region. For assistance with your business acquisition process, contact a Touchstone Business Advisors broker for expert, confidential and personalized representation.