| Question: How do I start looking for that right business? | | | | can get the word out effectively at little or no cost. For |
| Answer: There are two ways. You can shoulder the | | | | instance, speaking of the entrepreneur who ran his |
| assignment on your own, developing experience by | | | | own healthy food vending machine company. He also |
| looking at as many businesses as possible and, by trial | | | | had a tremendous knowledge in the personal training |
| and error, discover how to approach the subject of a | | | | field. He had a spot in the local radio show that |
| no-cash transaction with sellers. I'd call this the | | | | enabled him to promote his business to the wide public. |
| learn-from-your-mistakes approach; we've all used it | | | | Since it was something different and new to any other |
| from time to time in other areas of our lives. You can | | | | radio show, he had his spot for free-- yes, free! He |
| start out with the guidance of people who've "been | | | | also took calls on the show, had his phone number |
| there"...people who'll stand by and support you through | | | | broadcast during the show, and had an |
| the process, helping you cut down the search time | | | | question-and-answer format where people listening to |
| dramatically and enabling you to avoid the inevitable | | | | the show had the ability to ask questions to which he |
| and sometimes costly mistakes of flying solo. That's | | | | (or his guests) would answer directly on the air. The |
| why these program reports are established to assist | | | | show was not meant to advertise him directly but |
| you in areas where you feel help is most needed. | | | | meant as a public service gesture. |
| They are intended to aid serious, dedicated | | | | Publicity is remarkably different than advertising. It is far |
| entrepreneurs (like yourself) through the search and | | | | more credible and believable. And there are many |
| acquisition process so you don't have to go through it | | | | ways to get publicity for you business, let alone free |
| alone. | | | | publicity. In a hyper-competitive marketplace, |
| Profitable extra advantage: Once you learn the | | | | specializing causes people, other mediums, as well as |
| no-cash process, you'll have the additional power of | | | | other companies (looking to refer clients or to form |
| being able to "flip" businesses regularly-quickly buying | | | | strategic marketing alliances) to seek you out. Your |
| and then selling them for profit, potentially making | | | | goal is to become known as an expert in your field. If |
| hundreds of thousands of dollars a year. | | | | you have narrowed your focus to a very specific, |
| Question: Where do I get leads on businesses that | | | | highly specialized field, publicity will come easily to you. |
| might be available for no cash? | | | | The media (and particularly those that are specialized |
| Answer: I never rule out traditional sources among the | | | | as well) love to hear from people who are uniquely |
| areas to investigate. Your timing could be impeccable | | | | qualified. |
| and you could find acquisition opportunities in the | | | | Question: All this information is great and helpful. |
| newspaper classifieds, like the Business section of | | | | However, to locate the right business, what should my |
| Thursday's Wall Street Journal. Several other | | | | classified ad say? |
| specialized publications have such business listings. The | | | | Answer: That's the easiest part of all. All it needs to |
| key is to scan for descriptions that indicate an owner's | | | | say to get your phone ringing is this: "I'd like to buy a |
| possible motivation to consider a no-cash offer. Do not | | | | business in the (fill in the category) field. Immediate |
| worry about the quoted price or terms of the business. | | | | cash available (again, not necessarily your cash). |
| The sellers are trying to pre-qualify buyers by doing so. | | | | Question: Are there any "back door" ways to find |
| If you show that you are serious about buying their | | | | good businesses for sale? |
| business, they will listen to you and your proposal. At | | | | Answer: Actually, those individuals who come through |
| that point, you can sell them on your strategy and | | | | the back door are your potential suppliers, who always |
| close the deal efficiently. Make sure to keep in mind | | | | seem to know who in their industry is eager to sell. |
| that you're dealing with someone who's been in | | | | How can they be convinced to help? You can tell |
| business during the past decade; and your strategy | | | | them you would like it to be a mutual back-scratching |
| should not be too aggressive. If you are subtle in your | | | | situation, meaning that they give you the names of |
| offer and make it very appealing to the seller, you'll | | | | clients they believe would be willing to sell and you, in |
| have a win-win situation. | | | | return, would become a loyal and perhaps more active |
| Question: Can I approach the business suppliers? | | | | customer of theirs. |
| Answer: This can be an excellent idea. Suppliers | | | | Question: How do I find the suppliers? |
| always know who are the sellers in their industry. They | | | | Answer: Simply ask people in the business. For |
| will feel an obligation to give their best leads to valued | | | | example, if you wanted to buy a bookstore, ask the |
| customers, to built good will and assure a strong | | | | manager of your bookstore for the name of their local |
| relationship with you. | | | | wholesaler. Then call and ask to speak to the |
| Ask people in the trade which suppliers tend to sell to | | | | salesperson for the particular geographic area in which |
| your target industry. Don't forget the follow up. This | | | | you are interested. Suppliers frequently have close |
| can be THE most important task to accomplish. Make | | | | relationships with their long-time customers and can be |
| it a point to call them once a month to remind them | | | | a very good resource in finding the right business |
| that you are still interested in becoming their customer. | | | | opportunity. They will save you time and money in your |
| Question: Should I approach business brokers? Or do | | | | search for potential sellers in your desired industry. |
| they "jack up" the price of the business to | | | | Question: What about making an offer to the |
| accommodate their commission. | | | | company you work for? How often does that happen, |
| Answer: Rarely does the broker's commission affect | | | | and how would I broach the subject? |
| how much you pay for the business. Plus, the | | | | Answer: Actually, nearly 20% of all business buyers |
| participation of someone who's motivated to get the | | | | eventually buy the company they've slaved for as |
| business sold is a plus for the negotiation. They will | | | | employees. This strategy became very popular in the |
| actually help you in getting the deal closed. They will | | | | 20th century, and is also called a M.B.O (Management |
| participate in the negotiation and will help you get the | | | | Buy Out). In most cases, employees would want to |
| best deals. Think of them as real estate broker who | | | | approach their employer and propose to them their |
| wants to sell homes in order to earn commissions. | | | | strong desire to takeover. It is important not to go |
| Their job is to unite the buyer and seller to conclude | | | | bluntly about it. Use your charm, your negotiation |
| the deal. Keep in mind that it is estimated that more | | | | techniques and you'll be set. In this scenario, your new |
| than half of all businesses are sold through brokers | | | | business may literally be right under your nose. |
| meaning that they must not be overlooked as sources | | | | However, keep in mind that the criteria in selecting a |
| for your new business. The important thing to | | | | business should not only be for the following reasons: |
| remember in approaching a broker is to come off as a | | | | Convenience, ease of search in a particular industry, |
| qualified buyer, not as an amateur. | | | | and knowledge of the business. Rather, you should |
| Question: Can I simply seek out the seller directly? If so, | | | | consider whether you like the business, the people you |
| how? | | | | work with and the possibility for growth. Good standing |
| Answer: Actually, most buyers don't consider this | | | | with an employer you have worked with for years will |
| strategy even though this is exactly the way business | | | | be a great advantage to you by opening opportunities |
| brokers get their best listings. The advantage is that | | | | for possible future internal acquisition. Your employer |
| you are able to get to good candidates before the | | | | will trust you in handing over the business to you |
| business is "officially" up for sale and thus avoid the | | | | before contacting an outside buyer. This happens |
| competition of other prospective buyers. You've heard | | | | more often than you think and the result can be a |
| the saying before: "EVERYTHING IS FOR SALE". This | | | | no-cash bonanza if you handle it right. |
| includes businesses as well. What you need to know is | | | | In many situations, the business is family owned and |
| that all business owners are probably dreaming of an | | | | therefore can represent sentimental value to the |
| early retirement and want to travel around the world. | | | | owner. This should be treated delicately because the |
| Don't worry; your time will come to do so. Now by | | | | business is not yours until the papers are signed and |
| offering the seller a good price for his business (again, | | | | transferred. |
| not using your own money) you should be able to get | | | | Question: What is Management buyout all about? |
| it on your own terms. Plus, by going directly to them, | | | | Answer: Management Buyouts (MBO) have been |
| the seller will not need to pay extra fees during the | | | | successful at thousands of small and large companies |
| transaction. The seller might want to avoid the lengthy | | | | over the past 20 years. Such transactions represent a |
| procedure of prospecting the ideal candidate for the | | | | sizable percentage of all corporate transactions that |
| business. By placing an exclusive ad in the paper, the | | | | have occurred during that time. Increasingly, managers |
| seller eliminates jokers by identifying serious buyers in | | | | have come to expect participation in the ownership of |
| the initial stage of negotiation. This is when your | | | | the companies in which they work. Often, managers |
| strategy can be used to your advantage because by | | | | become owners in the context of a corporate |
| eliminating the jokers, practically no competition will | | | | transaction. These transactions compete with the |
| exist. At this point, you will be able to close the deal on | | | | more common strategic acquisitions by corporations |
| your own terms. Voilà! | | | | that are implementing either vertical or horizontal |
| Question: How do I locate these businesses? | | | | integration strategies. MBO's have a number of |
| Answer: Mailing lists with specialized business brokers | | | | advantages over strategic acquisitions. |
| are available to you. You can get this information | | | | Question: How does it work? |
| through our program reports. We'll supply you with | | | | Answer: During the 1980s, it became more common |
| quality business brokers so you can reach them and | | | | for members of management, assisted by an |
| start your preliminary research. With this in hand, you | | | | investment group, to purchase their company, |
| can shop around and select the brokers, depending on | | | | subsidiary, division or product line. These transactions |
| the industry you're interested in. After all, extensive | | | | are commonly known as leveraged buyouts, or LBO's, |
| research is required to make sure that the broker will | | | | because the buyout group finances the transaction |
| participate fully in finding the business best suited to | | | | with funds borrowed against the assets and projected |
| your needs. Make sure not to reveal too many of your | | | | cash flows of the entity being acquired. These |
| secrets in the preliminary stage of negotiation. Noticing | | | | transactions usually rely heavily on senior debt and |
| your level of expertise in business, they'll be very | | | | subordinated debt. |
| impressed and will want to deal with you in the future. | | | | However, LBO's received negative press for their use |
| Question: Is there any specific business terminology I | | | | in hostile takeovers. As a result, leverage buyout firms |
| should use during negotiation? | | | | began to refer to themselves as private equity firms |
| Answer: In our program reports, we teach the | | | | and to leveraged buyouts as management buyouts. |
| language of respect and credibility. That's the key. | | | | Question: What are the advantages of an M.B.O? |
| You want to be taken seriously and, at the same time, | | | | Answer: Existing senior managers that team up with a |
| you want to convey your respect for the seller's | | | | private equity firm have a number of advantages over |
| company. You should also make a statement of | | | | other bidders when competing for the purchase of a |
| interest in a carefully constructed way. In addition, you | | | | company. At times, these advantages give |
| will always provoke interest when you include and | | | | management the edge in the bidding process: |
| underscore the phrase: "I am a cash buyer." (not | | | | 1) The existing management of the company usually |
| necessarily your cash). A response of from one to | | | | understands the company better than any other |
| two percent of the businesses you contact by mail is | | | | prospective bidder. |
| excellent. You can follow up by phone if you don't hear | | | | 2) Management may know of hidden values in the |
| from them. Remind them of the letter you sent and | | | | company that will be hard for others to discover or |
| make the same general inquiry. | | | | realize. |
| Question: If they say "yes" or "maybe", what's the next | | | | 3) Management also requires less time to evaluate the |
| step? | | | | company and generally knows in advance that the |
| Answer: Invite the owner to breakfast or lunch, and | | | | company will soon be for sale. |
| also ask for a tour of his or her facilities. You might call | | | | 4) Management often has well-thought-out plans for |
| this the "sniffing and circling" phase. I will discuss later | | | | operating the company independently, including |
| how to qualify and analyze a business and what | | | | strategies to spur growth or reduce costs. An |
| documentation (financial mostly) to request from the | | | | independent company requires less corporate |
| owner. | | | | reporting and can eliminate overhead costs associated |
| Question: What other ways can I obtain quality leads? | | | | with its parent. |
| Answer: Advertise your interest in buying. Many | | | | Management usually has close, personal ties with the |
| specialized magazines are offered for these purposes. | | | | company's financing sources. A |
| The yellow pages and local newspapers can attract | | | | management-supported bid is often viewed |
| potential sellers. Look for categories, such as "Business | | | | sympathetically by the board of directors, which must |
| for sale", "Business opportunities", and "Franchise for | | | | ultimately decide to whom to sell. |
| sale". These ads offer possibilities to buy available | | | | Question: What kind of management buy-out exists? |
| businesses throughout your city or state. Sellers place | | | | Answer: There are several kind of management |
| most ads under these different categories, a method | | | | buy-out out there. An MBO can be initiated by the |
| that can be especially effective for potential buyers | | | | owner, the management or a third party. |
| because there is very little competition in purchasing | | | | Owner-initiated MBO:o A corporation's owner or board |
| businesses through classified ads. You have to know | | | | of directors may realize that selling the company may |
| precisely what kind of business you're looking for in | | | | be most effectively accomplished through an MBO. |
| order to carve a niche. | | | | The board of directors may assist a management |
| Always make yourself available to visit the seller and | | | | employee buyout in either a privately negotiated sale |
| cut yourself an interesting deal. Now, you probably | | | | or private auction of the company. |
| want to know where to place your ad. Selecting the | | | | Private sale:o In a private sale, the board can control |
| right newspapers will list telephone numbers to contact | | | | virtually all aspects of the transaction. The board can |
| these specific newspapers or magazines. For broader | | | | negotiate with management regarding the terms and |
| categories, the local Sunday classifieds will do just fine. | | | | conditions of the sale. Additionally, the board can divest |
| Advertising in this way could also flag down sellers | | | | the company to raise the necessary financing to |
| who cannot be reached by direct mail. And, as I've | | | | implement an MBO. This can be done entirely at the |
| mentioned, when the prospective seller calls you, it | | | | expense of the seller. The board's control of a private |
| means he or she is a solid lead. Because they're | | | | sale is, however, limited by its financing sources and by |
| pursuing you at this stage, rather than you pursuing | | | | the need to protect the interest of minority |
| them, you have gained a psychological advantage. | | | | shareholders. |
| Question: You mentioned previously: "in order to carve | | | | Private Auction:o The board can also conduct the sale |
| a niche". How can I carve myself a niche in the market | | | | through an auction yet still support an MBO as one of |
| place? | | | | the bidders. The company can assist the MBO by |
| Answer: A niche is another way of referring to a | | | | using corporate funds to help fund the management's |
| "target market", discussed in the previous pages of this | | | | retention of expert advisors. It can also give |
| strategy. In today's hyper-competitive marketplace, | | | | management complete access to company books, |
| long gone are the days of mere prospecting and | | | | records, and advisors. This offers the seller an |
| crafty (and often misleading) sales tactics using 1,000 | | | | additional bidder with certain competitive advantages |
| approaches to "close the deal." Due to the information | | | | and may result in the seller getting a higher price for |
| revolution, consumers are now more informed, more | | | | the company than it might otherwise have obtained. |
| educated, and incredibly more sophisticated than ever | | | | Where the company is in distress, this often assures |
| before. Using an over-abundance of techniques is no | | | | the seller of having at least one non-liquidation bidder |
| longer effective, or in the very least, they are not as | | | | for the company. |
| effective as they used to be. Let's face it. People can | | | | Management-Initiated Buyout:o A management-initiated |
| no longer be "sold" let alone tricked. With information at | | | | buyout is typically initiated by senior management and |
| their fingertips (such as with the Internet), they can find | | | | can be supported by the board and owners of the |
| out almost anything in a matter of seconds. However | | | | company, even to the extent of providing corporate |
| and unfortunately, there are many companies still | | | | funds to conduct such an effort. |
| training their sales people to use these outdated | | | | Third-Party-Initiated Buyout:o Any prospective bidder |
| approaches. Prospects not only see them coming but | | | | for a company can integrate the management into the |
| they also consider such techniques to be insulting. I do | | | | overall ownership structure of the transaction. Such an |
| say "outdated" because, in our knowledge-based | | | | effort can reap the various advantages associated |
| economy, more and more sales tactics are being | | | | with MBOs noted above and therefore enhance its |
| frowned upon with each passing day. | | | | competitiveness. However, strategic buyers are |
| Several methods can be used to carve yourself a | | | | generally not willing to provide management with |
| niche. | | | | ownership and so generally would not be willing to |
| 1) The first rule in pre-qualifying prospects is to | | | | participate in an MBO. |
| specialize. The most common mistake newcomers to | | | | Question: How is the financing done in MBO compared |
| any field of business make is to think that by | | | | to LBO? |
| expanding their portfolio they will secure more | | | | Answer: It is done differently; however, the concept of |
| business. Nothing can be further from the truth. | | | | using debt to finance the acquisition is practically the |
| Specializing and narrowing one's focus as much as | | | | same. Virtually all MBOs are financed with a |
| possible will paradoxically increase the likelihood of | | | | combination of senior debt, subordinated debt, and |
| getting more business. | | | | equity. The amount of equity required in a transaction |
| 2) Specialization is in itself a fundamental marketing | | | | is determined in part by the amount of debt that can |
| process. It's amazingly effective in creating | | | | be borrowed. The following describes the various |
| "top-of-mind" awareness among a specific target | | | | components of financing in a typical MBO. |
| market. For instance, an accountant specializing in car | | | | (Note: All the following information requires complex |
| dealerships will get more business than a general | | | | negotiation techniques with the help of a professional |
| accountant will. An advertising consultant specializing in | | | | team of lawyers, accountants and business |
| print media for home furnishing stores will get more | | | | consultants. |
| business than a typical advertising agent will. A | | | | But please, don't try this at home. J) |
| photographer specializing in weddings will get more | | | | Senior Debt:o Typically, 50% to 70% of an MBO's |
| business than a regular photographer will. And the list | | | | financing takes the form of senior financing. A senior |
| goes on and on. | | | | loan is collateralized by a first lien on the current and |
| Over the years, specialization has been referred to as | | | | long-term assets of the company. Senior financing is |
| "niche" marketing. As more and more businesses get | | | | generally made available from banks, although privately |
| started, the less time, energy, and money people will | | | | placed notes to institutional investors are also possible, |
| have to spend in making choices of those with whom | | | | or a public issue of bonds or stocks is on occasion the |
| they choose to do business. Specialization helps to | | | | source of senior debt. |
| solve that problem. | | | | Revolving Line of Credit:o One component of senior |
| Question: I understand the concept of carving a niche. | | | | debt is almost always a revolving line of credit. It is |
| However, how can I now attract consumers to my | | | | loaned to an MBO based on a certain percentage of |
| newly acquired business? | | | | the appraised orderly liquidation value of the eligible |
| Answer: Consumers will choose when they have a | | | | accounts receivables and inventory. Such loans are |
| choice presented to them to go to a business that | | | | further limited by the predictability of cash flow to |
| specializes in a unique area in which they have a need. | | | | service senior debt. A revolving line of credit typically |
| Think of it as a laser, which is basically a beam of | | | | has a term of one year with renewal provisions. The |
| highly concentrated light. You want to focus like a laser | | | | interest rate ranges from the prime rate to three over |
| on your niche and, when you do, you will plant your | | | | prime. |
| business and your product into your prospects' minds. | | | | Senior Term Loan:o Another component of senior |
| Specialization casts an aura of superiority and | | | | debt is a senior-term loan. This is a loan based on a |
| exclusivity. When you deal with a specialist, you will | | | | certain percentage of the appraised fair market value |
| automatically assume that this person has greater | | | | of the land and buildings and the orderly liquidation |
| expertise, has greater knowledge about the field, and | | | | value of the machinery and equipment. Such loans are |
| offers greater service since, by catering to a unique | | | | further limited by the predictability of cash flow to |
| market, it implies that he or she will have a better | | | | service senior debt. The term for senior term debt is |
| understanding of your situation, needs, and concerns. | | | | typically five to eight years. The interest rate ranges |
| Additionally, niche marketers generate far more serious | | | | from the prime rate to three over prime. |
| prospects than general, curious ones. Specialization is | | | | Subordinated Debt:o Typically, 15% to 30% of the |
| the wave of the future. And the greater the | | | | financing of an MBO is in the form of subordinated |
| competition will become, the greater the need for | | | | financing. These funds are subordinated to senior debt |
| more specialists. For example, why do you think there | | | | and generally have only second claim to the collateral |
| is a trend in specialty stores these days? They are | | | | of the company. Subordinated financing is generally |
| popping up everywhere! Today, there are stores selling | | | | made available directly from subordinated debt private |
| only dry foods in bulk. There are vitamin and food | | | | and public funds and, in large transactions, directly from |
| supplement stores. There are electronics stores. There | | | | insurance companies. |
| are toy stores. There are even mothers-to-be and | | | | Alternatively, it is raised through initial public offerings of |
| baby clothing stores! The need to specialize is obvious. | | | | high-yield ("junk") bonds to insurance companies, |
| With the media bombarding you with information and | | | | pension funds and other institutional investors. In many |
| with your very limited time to be able to shop around | | | | MBOs, a large part of the debt is given back to the |
| for the best product from the best company at the | | | | seller, comprising a portion of the purchase price. The |
| best price, you will more than likely go the store that | | | | term of such financing is typically six to 10 years, and |
| pops into your mind and do so only when the need | | | | principal payments are commonly deferred until after |
| presents itself. For instance, you can buy a toaster | | | | the senior debt is retired. These funds are loaned |
| from a department store, a home furnishings store, a | | | | based on the amount and predictability of cash flow |
| kitchenware store, an appliance store, a grocery store, | | | | exceeding that required to service senior debt. |
| and a drugstore -- even a bank! Heck, if there were a | | | | Equity:o Typically, 10% to 20% of the financing of an |
| toaster store, you'd probably go there first. So ideally, | | | | MBO is in the form of equity financing. These funds |
| your job is to find your niche and to narrow it down as | | | | make up the difference in the financing requirement |
| much as possible. | | | | and the financing available in the form of debt. |
| Question: With the fierce market competition, how can | | | | Management usually invests in the equity of an MBO |
| I be the leader and be nationally recognized by the | | | | company together with a private equity, a corporate |
| consumers? | | | | investor or a group composed of institutional equity |
| Answer: You want to be the leader in your category | | | | investors. The seller and subordinated lenders |
| or in your unique area of expertise. By doing so, free | | | | sometimes receive equity in the new company. An |
| publicity will flow to you quite easily. Non-traditional | | | | institutional investor investing in the equity of an MBO |
| mediums will seek you out. Specialized publications, | | | | typically seeks a 30% to 40% compounded annual |
| strategic marketing alliances, and community television | | | | total return over five years, depending on the |
| stations are wonderful mediums through which you | | | | perceived risk. |