Index
absentee owners, 50
accountants, 40, 210–211, 214, 217
accounting due diligence, 214–221
Acken Sign Company, 176
acquisition entity, 262–263
acquisition process, 33–42
completing the acquisition, 40–42, 207–276
See also search process
add-backs, 170
ADEX Machining Technologies, 131–132, 134, 135
Alliance of Merger & Acquisition Advisors, 105
Ambrosia, Greg, 15–18, 25, 82–84, 145–146
appraisals, 263–264
asset-based lenders, 233–234
asset purchase agreement, 261–271
assets
buying company’s, 196
specialized, 134
Association for Corporate Growth, 105
Association of Professional Merger & Acquisition Advisors, 105
attorneys. See lawyers
Axialmarket.com, 58
bank loans, 41, 192–193, 232–233, 237–243. See also financing
bank statements, 215–216
base rate, 241
basket, 266–267
Bautista, Tony, 6–8, 82–84, 146
benefits
employee, 26–27
forgone, 59–61
Be Our Guest (BOG), 126–127
brand names, 27
Braus, Jenn, 19–20
broken-deal costs, 61–62
brokers. See business brokers
budgeting, for search costs, 53–62
conversations with, 113–114
evaluating businesses presented by, 107–114
finding, 105
information provided by, 99–100, 112–113, 116, 125–126
introductions to, 106–107
role of, 104–105
to source prospects, 51–52, 103–114
specialties of, 96
business characteristics
enduring profitability, 80–81, 100, 125–136
identifying wanted, 79–91
to ignore, 90–91
investigating, 85–86
lifestyle considerations and, 86–87
matching with skills, 84–86
slow growth, 81–84
business entities, 262–263
businesses
evaluation of potential, 107–114
financial information on, 137–142
high-growth, 81–82
information about, 97–99
versus jobs, 87–90
onsite visits to, 165–167
profitable, 79, 80–81, 100, 125–136
prospective (see prospects)
reputation of, 126–127
slow-growth, 81–84
without enduring profitability, 133–135
business language, 73
business name, 55
business owners
absentee, 50
commitment to sell of, 143–157
contacting directly, 36–37, 45, 51–52
continuing involvement of, after sale, 154–155, 198
in essential roles, 90
message to, in direct sourcing, 117–120
unrealistic price expectations of, 150–152
willingness to sell of, 100–101
See also sellers
business ownership, 3–4
business practices, 213
Calderon, Eric, 146
capital
sources of, 231–232
See also financing
cash, control of, 274–275
cash-flow lenders, 233, 234–235
cash flows, 4, 11, 148–150, 184, 186, 217, 240–242, 274–275
Castronics, Inc., 127–129, 135, 275
catch-up, 250
change-of-control consents, 221–222
character assessment, of seller, 212–213
CIM. See confidential information memorandum (CIM)
client meetings, 275
colleagues, community of, 27–28
commercial contracts, 221–222
commitment to sell, of owners, 143–157
cash flow consequences and, 148–150
continuing involvement post-sale and, 154–155
external factors influencing, 144–147
hidden reasons and, 147–148
misunderstanding of sales process and, 152–154
multiple partners and, 155–156
price expectations and, 150–152
communication
expenses, during search process, 57–58
follow-up, with investors, 76
with potential sellers, 117–120, 121–123
skills, 30
company data, 58
company name, 55
company structure, 262–263
comparable transactions, 178–179
competitors, 81, 83, 127–129, 134
confidence, 30
confidential information memorandum (CIM), 99, 109, 112–113, 116, 170
confirmatory due diligence, 39, 40–42, 209–229, 261–262
accounting, 214–221
actions based on, 226–228
customer interviews, 213, 222–223
employee interviews, 223–225
honesty and character of seller, 212–213
legal, 221–222
overview of, 209–212
specialized, 225–226
corporate structure, 178
covenants, 237–240
credibility, establishing as buyer, 121
customer concentration, 140
customers
attracting new, 83
being unimportant part of expenses of, 129–130
integrating with, 131–133
losing, after acquisition, 81
recurring, 80–81, 100, 125–127
retention of, 81
cyclical businesses, 133–134, 140–141
database systems, 58
Dealnexus.com, 58
financing, 191–196
for investors, 250, 252–253, 255, 257
renegotiating, 227
timing of closing and exclusivity, 197
transaction structure, 196
transition period, 198
working capital peg, 197
debt, seller, 180–181, 193–195, 231, 236, 243–244, 267–268
debt financing, 192–193, 231–245
debt-free, cash-free acquisitions, 152–153
debt service coverage ratio, 238
decision making, 30
based on incomplete information, 26, 29
next steps for, 31–32
deeper filters, 99–101
Dickinson, Patrick, 103–104, 113, 127, 275
direct rewards, 24–25
direct sourcing, of prospects, 51–52, 115–124
advantages of, 115–116
filtering prospects, 120–123
finding interested sellers, 116–120
time involved in, 117
due diligence
accounting, 214–221
confirmatory, 39, 40–42, 209–229, 261–262
legal, 221–222
personal involvement in, 210–212
specialized, 225–226
earnings before interest, taxes, depreciation, and amortization (EBITDA), 38, 138, 170, 172–173, 175–180
adjusting, 179–180
covenants and, 238
fluctuations in, 217
inaccurate, 217
earn-outs, 194–195
email, contacting potential sellers via, 117
email address, 57
emotional ups and downs, 24–25
employee benefits, 26–27
employee interviews, 223–225
employees, introductions to, 273–274
employer identification number (EIN), 54–55
employment agreements, 270
enduringly profitable businesses, 79, 80–81, 100, 125–136
competitors of, 127–129
customer integration and, 131–133
filtering for, 135–136
importance of being unimportant and, 129–130
reputation of, 126–127
using financial information to gauge, 137–142
entrepreneurs
skills and traits of, 29–31
values of, 22–26
entrepreneurship through acquisition, 3–20
alternatives to, 10–11
financial opportunity of, 12–15
making choice for, 18–20, 21–32
risks of ownership and, 10–12
search process (see search process)
women and, 19–20
environmental hazards, 226
equipment, 225
equity financing, 195–196, 247–259
equity investors, 40–41, 84, 195–196, 247–259
escrows, 265–267
established firms, 80–81
evaluation, of potential businesses, 10, 107–114
excess cash flow sweep, 240–241
exclusivity, in deal terms, 197, 209–210
exploration phase. See search process
external factors, influencing commitment to sell, 144–147
family
considerations, 86–87
as potential investors, 71–72
fees, on loans, 241–242
filtering prospects, 95, 120–123
deeper filters, 99–101
for enduring profitability, 135–136
initial filters, 97–99
for owner’s commitment to sell, 143–157
quantitative filters, 141–142
finance companies, 193
financial information, 137–142
financial projections
building, 167–173
determining valuation using, 181–186
financial prospects, 4
financial ratios, 238, 239–240
financial rewards, 12–15
financial statements, 214–221
financing, 41
assumptions, in financial model, 182
loan terms, 235–243
seller, 193–195, 231, 243–244, 267–268
senior loans, 192, 193, 231, 232–243
flow-through entities, 219–220
Footbridge Partners, 67
forgone salary and benefits, 59–61
friends, as potential investors, 71–72
friendships, 27–28
fund-raising process
approaching investors, 70–76
closing the fund, 69–70
negotiating terms, 69–70
offering memorandum, 67
raising funds, 68–69
See also search funds
Gemini Investors, 176
Goodman, Jim, 176
Great Eastern Premium Pet Foods (GEEP), 194–195
growth, 177
high-growth businesses, 81–82
historical results, analyzing, 170–171
hobbies, 91
honesty, of seller, 212–213
income stream, 89–90
income tax obligations, 245n2
indication of interest (IOI), 39, 188–189
industry research, 164
information
from brokers, 99–100, 112–113, 116, 125–126
in CIM, 109, 112–113, 116, 170
financial, 137–142
from first call, 122–123
about industry, 164
in investment memorandum, 248–257
about prospective businesses, 97–99
infrastructure, 28–29
initial filters, 97–99, 122–123
institutional investors, 84
interest rates, 241
internal rate of return (IRR), 184, 252
Internal Revenue Service (IRS), 55
International Business Brokers Association, 105
interviews
employee, 223–225
inventory valuation, 244n1
investment memorandum, 248–257
investors
contacting, 68
to cover search costs, 63–64, 66, 68–76
equity, 40, 41, 84, 195–196, 247–259
follow-up communications with, 76
institutional, 84
list of potential, 68
meeting with, 40
negotiating terms with, 69–70
offering memorandum for, 67
as peers, 73
people you know as, 71–72
presentations to, 72–76
return on investment to, 4
rights and responsibilities of, 55–56
terms for, 250, 252–253, 255, 257
IOI. See indication of interest (IOI)
IRR. See internal rate of return (IRR)
jobs, versus businesses, 87–90
job satisfaction, 32
job security, 11–12
Kovitz, Robin, 19
large organizations
employment at, 11–12
prestige of, 27
resources and infrastructure of, 28–29
leadership skills, 29–30
learning, 25–26
leases, 221–222
legal due diligence, 221–222
legal fees, 53–56
finding senior, 232–235
meeting with, 40
letter of intent (LOI), 39–40, 161, 199–205
getting seller to sign, 204–205
items to include in, 201
level of detail in, 202–204
lifestyle considerations, 86–87
limited liability corporation (LLCs), 54–55, 263
limited partnerships (LPs), 263
LLCs. See limited liability corporation (LLCs)
loan amortization schedule, 240–241
loans, 41, 192–193, 231, 232–243
asset-based, 233–234
bank, 41, 192–193, 232–233, 237–243
cash-flow, 234–235
covenants, 237–240
personal guarantees, 241
rates and fees, 235–236, 241–242
repayment schedule, 240–241
size, 236–237
terms of, 235–243
LOI. See letter of intent (LOI)
machinery and equipment, 225
management structure, 89
market niches, 52
MBAs, 29
mistakes
fear of making, 30
learning from, 26
Muszynski, Charles, 12
of purchase agreement, 261–271
on terms for search funds, 69–70
net working capital, 268
nonbank lends, 193
noncompete agreements, 269
nonrecurring business expenses, 179–180
Nurse Care of North Carolina (NNC), 115, 132–133, 135
offering memorandum, 67
offers
calculating purchase price and, 175–189
creating indication of interest, 188–189
deal terms in, 191–198
deciding on price strategy, 186–188
letter of intent, 199–205
making, 38–40
negative responses to, 39–40
price and terms in, 38–39
renegotiating, 227
office expenses, 56–57
onsite visits, 165–167
operating agreements, 55–56
opportunity costs, 60–61
ownership, risks of, 10–12
partners
buying businesses with multiple, 155–156
operating agreements between, 55–56
in search process, 47–49, 55–56
pass-through entities, 54–55, 264
payroll taxes, 220
peers, 27–28
persistence, 30–31
personal fulfillment, 15
personal interests, 90–91
personal values, 22–26
personnel issues, 268–270
postsale appraisal, 263–264
predictability, of EBITDA, 177–178
preliminary due diligence, 38, 161–173
financial projections, 167–173
industry research, 164
interviewing seller, 164–165
onsite visits, 165–167
questions during, 162–164
preparation for search, 34
presentations, to investors, 72–76
private lending partnerships, 193
professional advice, 40
professional advisors, 210–212
profitable firms, 80–81
promissory notes, 243–244
proof of cash, 210, 214, 215–217
prospects
filtering, 37, 95, 97–101, 120–123, 135–136, 141–142, 143–157
information about, 97–99
investor, 70–76
sourcing (see sourcing prospects)
purchase, structuring of, 4, 263–264
purchase agreements, 41
acquisition entity and, 262–263
closing and, 271
escrows and setoffs, 265–267
negotiation of, 261–271
net working capital, 268
personnel issues, 268–270
representations and warranties, 265
seller note, 267–268
structure of purchase and, 263–264
adjusting, for seller debt, 180–181
calculating, 175–189
comparable transactions and, 178–179
deciding on strategy for, 186–188
EBITDA and, 175–180
financial projections to determine, 181–186
unrealistic expectations about, 150–152
purchase terms. See deal terms
quality of earnings analysis, 40, 214, 217–219
quantitative filters, 141–142
questions
in customer interviews, 223
in employee interviews, 224–225
initial, 98–99
during preliminary due diligence, 162–164
recurring customers, 80–81, 100, 125–127
recurring revenue, 132–133, 139–140
regular salary, lack of, 26–27
regulatory compliance, 226
repayment schedule, 240–241
representations and warranties, 265
reputation, of business, 126–127
resources, 28–29
return on investment, 4, 12–15, 89, 247, 255, 257
revenue, 139–141
rewards, 24–25
risks
of employment, 11–12
in high-growth businesses, 81–82
of ownership, 10–12
tax, 219–221
Robertson, Rod, 106–107
rules changes, 226
salary
as business owner, 89
forgone, 59–61
lack of regular, 26–27
during search process, 63–64
Salesforce.com, 58
sales growth, 140
sales process, misunderstanding of, 152–154
sales taxes, 220
small business association 7(a) loan program, 233
S-corporations, 263
search costs
broken-deal costs, 61–62
budgeting for, 53–62
communication expenses, 57–58
company data, 58
determining, 45–62
forgone salary and benefits, 59–61
investors for, 63–64, 66, 68–76
legal fees, 53–56
office expenses, 56–57
paying for, 63–77
travel expenses, 59
closing, 70
negotiating terms for, 69–70
offering memorandum for, 67
raising, 68–69
search process, 6, 9, 15, 24, 27, 30–31
defining parameters for, 46–53
determining costs of, 45–62
effective management of, 95–101
finding right business, 34, 36, 79–91
minimizing, in self-funded search, 64–65
preparation phase, 34
salary during, 63–64
scope of, 49–50
self-funded, 64–66
sourcing prospects, 36–37, 50–52
specific type of business and, 35
time commitment for, 59–60
securities, types of, 249–250
self-employment, 87–88
self-funded searches, 64–66
seller debt, 180–181, 193–195, 231, 236, 243–244, 267–268
seller notes, 267–268
sellers
commitment to sell of, 143–157
continuing involvement of, after sale, 154–155, 198, 270
finding interested, 116–120
first call to potential, 121–123
honesty and character of, 212–213
information provided by, 123–126, 164–165
interviewing, 164–165
message to potential, 117–120
representations and warranties by, 265
signing of LOI by, 204–205
uncommitted, 121–122
visits to, 123
willingness to sell of, 100–101, 121–122
See also business owners; prospects
senior loans, 192, 193, 231, 232–243
setoffs, 265–267
shareholders’ agreement, 55–56
Shayler, Randy, 55, 109, 136, 141–142, 146, 167, 226–227, 250, 270
size, of business, 84, 122, 178
skills
communication, 30
leadership, 29–30
matching business with, 84–86
slow-growth businesses, 81–84
small business
choosing to purchase, 18–20
evaluation of potential, 10
financial prospects of, 4
finding right, to buy, 34, 36, 79–91
making offer on, 38–40, 199–205
reasons for sale of, 14–15
risks of ownership, 10–12
variety and uniqueness of, 4–5
See also businesses
Small Business Administration (SBA), 192–193, 232, 233, 235
small-business owners. See business owners
social causes, 91
social isolation, 27–28
social networks, 27–28
software systems, 225
sourcing prospects, 36–37, 50–52, 95, 96
coordinating choices, 52–53
specialized assets, 134
specialized due diligence, 225–226
Spinner, Doren, 176
spreads, 241
start-up businesses, risks of, 11
stock, buying company’s, 196
storytelling, during investment pitch, 74–76
stress, 25
structure, 23
success, 32
Succession Leadership Capital, 55
survival period, 266
switching costs, 131–133
tax deductions, 263–264
tax returns, 216, 217, 219–220
tax risks, 219–221
technology-driven companies, 133
telephone system, 57
tenacity, 6
time commitment
for direct sourcing, 117
to running business, 87
for search process, 59–60
transaction structure, 196
transition period, 273–276
in deal terms, 198
seller involvement during, 270
travel expenses, 59
Tuma, Jude, 47
values, 22–26
Vector Disease Control International (VDCI), 129–130, 135, 234
walking away, 228
“Wall Street no,” 40
warranties, 265
websites, 57
Weiner, Michael, 103–104, 113, 127, 275
women, as business owners, 19–20
work hours, earnings and, 89
working capital, 153, 154, 268
working capital peg, 197, 202–204
year-to-year sales growth, 140
Zeswitz Music, 113–114, 136, 141–142, 146, 167–173, 183–186, 187, 223, 226–227, 250–252, 254–257, 270
Zoho.com, 58