Acquisition Consulting for Buyers
In order to describe this consulting service for Buyers, let's imagine a rather common scenario, which could be why you have selected this page on PGLC's web site.
Let's assume you have been searching for a business to acquire for quite some time. You have probably found several businesses for sale within your initial acquisition criteria, which are all represented by intermediaries. But, your search, as yet, has not produced a business that is really of particular interest, for any number of reasons.
Then, just recently, you discovered a business that appears to be an almost exact fit; based on its industry, type of customers, location, age and other initial information. What is different about this business; is that it is not represented by a professional intermediary, but is for sale: by the Owner.
You meet with the Owner, tour the business and receive additional information, which consists of financial statements and tax returns. Your accountant looks over the financials and believes that they appear to be in order, but questions the asking price. Next, you meet with a lender; and your request to finance the acquisition is declined.
Initially, you may have also been curious about the asking price. So, based on what you believe, you have learned from your accountant and the lender; you decide to make, what you think, is a "fair" offer on the business. But, are you really sure that your price is right? Is your offer based on a "Rule of Thumb" that a business should sell for "X" percent of sales and/or "X" multiple of some profit number, and is your definition of this number correct? Considering your enthusiasm for this business; could you possibly still be "over-bidding" on the business (which could result in another denial for financing) or is your offer so "low" that you are actually just "fishing" for the bottom number that the owner might accept?
At this point, you are not ready to spend the money for an attorney to draw-up a formal offer on the business; so you contact the owner, and tender an offer on the business. As your offer is probably well below the asking price; the owner not only rejects your offer, but is also likely "incensed" by it, saying that he is not going to "give the business away."
It is not uncommon that the dollar amount of an offer may have been appropriate. However, if the tendered offer fails to address certain milestone dates of the acquisition, the terms of the offer, and is not properly presented to put the offer in perspective with the market and benefits to the owner; it is often usually "rejected."
So, what is your next move and/or where do you go from here? Another offer could result in rejection and/or declined financing or an endless train; until all of the parties involved begin to wonder if you are genuinely serious about the acquisition. Now you are at an impasse; somewhere between the lender, your accountant and the owner.
Now, let's look at some of the issues that developed the above situation. The owner has probably worked very hard to make his business successful and usually always also has an emotional attachment to it. Based on somebody he knows and/or, who knows somebody, who sold a business, and what conventional wisdom says a business should sell for; he has rationalized in his own mind that his asking price is certainly justifiable.
Both your accountant and the lender could be correct in their position on value, but it is based only on the limited financial information that was made available to them. If they performed any "add-backs" to the financial statements, where these substantiated by the owner as valid or are they just general assumptions? Due to not having a specific definition of what is included in certain categories in the financial statements from the owner, where some add-backs over looked? Did either of them research an extensive data base of recently closed transactions for similar businesses? Did they examine the trend of the economy, the industry and the outlook for the future of the business? Did they evaluate any other non-financial factors of the business?
In order to make an appropriate judgment on the fair market value of any business, all of the issues in the above paragraph must be addressed and evaluated. Basically, all three approaches, asset, income and market must be considered along with, which of several methodologies within each approach are appropriate, in order to value a business.
It is possible that the owner's asking price could be close to "right" as well as it could significantly over-price the business. Most business owners are primarily very competent at running their business. Most business owners also only sell a business "once." And for this reason, usually don't have the resources available, understand or know how to identify all of the factors that either ad to or subtract from the value of their business.
In summary, a certified and accredited professional intermediary has had the training, the market data bases available as references, and thus the expertise to value a business. A comprehensive evaluation of a business will either provide the owner with a much needed "reality check" or by identifying specific aspects of the business, which were not previously considered; could validate the owner's asking price.
The Buyer, who makes the investment in Buyer Consulting Services, can go forward with "peace of mind" of a prudent decision on a successful acquisition transaction.