Retail
Principles of purchasing
How to use a cautious approach when vetting acquisitions
By Erik Cassano
Smart Business Cleveland | April 2008
When Rick Voigt vets
an acquisition opportunity, he lets the other guys talk first.
Voigt, co-founder, president and CEO of 38-employee Today’s Business
Products, wants to hear
what the leaders of the company he’s considering purchasing have to say about
their company — its money-making points, the areas that
need improvement and,
above all, what they think is
a fair asking price.
“Think about buying a car,”
says Voigt, who has completed two acquisitions
since 2004. “If I tell you I’ll
give you $10,000 for your
car, you might say, ‘Sure,
but I was only going to ask
for $8,000.’ So that’s why
you have to ask what they
have in their mind as a fair
price. After you establish
that as a base, which is really the most you would pay
for it, then you can work it
out to a number that works
for both of you.”
It’s all part of Voigt’s philosophy on acquisitions: Take it
slowly, listen constantly and
gather as much information
as possible.
When you are purchasing a
company, Voigt says you’re
not really purchasing the
company itself. In fact,
because of potential legal liabilities, you might not want
to purchase the company
pound for pound. What you
are purchasing is the business of its customers. As
such, you want to make sure
that you can adequately
serve the new customers you
are absorbing through the
acquisition.
One of your first stops
when vetting a potential
acquisition, Voigt says,
should be the company’s customer lists.
“After we’ve signed the confidentiality agreement, we’ll
sit down and look at their
customer lists,” he says. “I try
to find out about the relationship with each customer.
That’s where the ‘80-20 rule’
comes into play. You can
probably assume that 80 percent of their business will
come from 20 percent of their
customers. So you really have
to look at the top 80 percent
of the business, how long they’ve been an account,
what is the relationship with
them and are there additional opportunities.”
Voigt says that due to attrition, you can only safely
assume that 60 percent of an
acquired company’s customers
will shift to your business.
The remaining 40 percent
might not be the right fit for
what you offer.
To maximize the number of
customers you are able to
bring over to your business,
search the management staff
of the company to be acquired
for potential leaders who
could fill roles on your management team. They will give
you valuable insight into the
history of the business, and
they might be able to bring
additional customers with
them.
“If they have some quality
current staff, we let them
interview. If we can use
them, we bring them on,” he
says.
Customers and employees
are the first groups of people you have to consider
when vetting a potential
acquisition. But Voigt says
the litmus test of whether
you pull the trigger on a purchase will be in the numbers. If the numbers you see
don’t equal the words you
hear, walk away.
“It all goes back to trends,”
he says. “If the owner is
telling me business is great,
and I look at his trends and
they’re going the other way, I
can see that what he’s telling
me doesn’t add up. That’s the
big thing. You have to know
you’re going to have a return
on your investment.”
HOW TO REACH: Today’s Business Products, (216) 267-5000 or www.todaysbusinessproducts.com
Lessons of acquisitions
If you have the financial clout,
purchasing another business is a
way to quickly increase your company’s size and customer base.
But the road to a successful acquisition can be covered with booby
traps, says Rick Voigt, president,
CEO and co-founder of Today’s
Business Products, so you have to
go on the defensive and remember
that your first responsibility is to
protect your own company.
Voigt has completed two acquisitions since 2004 and has learned
a number of lessons along the
way. Here are a few of them:
- Do what you say you’re going to do. “If you make a promise, you have to fulfill it. The last acquisition we
made, we went above and beyond
our promise to the owners. The first
acquisition, we had a retirement
party for the owner. He was just
shocked. He said, ‘I can’t believe
you’d do that for me.’ We invited his
customers over to see us. It was
very well-received, and he was very
happy. Now, we tell potential acquisition candidates to call him, and
he’ll tell you how we work.”
- Hold the other party
accountable.“When you’re talking to a potential buyer, once they have made the
commitment to sell, if they’ve
changed their minds, it has to cost
them something to get out of it.
You’ve put the time and money
into making this proposal, and you
have to say that you’re not going to
let them do this and just walk away
from the table. That clause has to
be in the contract.”
- Hire an experienced attorney. “Make sure you are purchasing
only what you want to purchase,
that you’re not purchasing bad
debt, tax liens or impending lawsuits.”
