Best practices to follow and pitfalls to avoid with your next acquisition

So, you think you know what it takes to buy a business? With the range of available financing options and a red-hot M&A market, there’s a lot to consider.

Finance-minded experts and entrepreneurs shared their experiences at ASPIRE last year. The discussion, moderated by Brian Dobis, senior vice president of commercial banking and C&I team manager at S&T Bank, featured:

Douglas P. Brosius, Partner, PNC Mezzanine Capital

Jeffrey A. Ford, Partner, Grossman Yanak & Ford LLP

Matt Harnett, Partner, Tecum Capital

Bob Petrini, President, Chick Machine Co. LLC

 

Strategies for buying

As long as the basket looked good, I was OK with putting all of my eggs in one basket.

—Bob Petrini

In this type of competitive market, you have to be able to turn over every rock that you find and see if there is a deal there.

—Doug Brosius

If you are already so invested that you can’t walk away, you’re probably losing objectivity. Maybe you’ve decided emotionally you need to do the deal from either the buy side or the sell side, maybe you’ve invested so much the breakage fees are too high, financially. But if you lose objectivity, you miss too many other things.

—Jeffrey A. Ford

 

Your adviser’s role

We know they just put a little lipstick on this pig, and our job now is to wipe off the lipstick a little bit and see what the creature looks like underneath — allow our client to see what this creature really is going to look like, how will it behave, how much will the cost be to assimilate it into my herd, and what other baggage will it bring with that.

—Jeffrey A. Ford

 

Make a note

Everybody thinks of customer concentrations, but that is so obvious. Nobody needs us to find a customer concentration. We have found more fascinating things in other concentrations: over 70 percent of sales represented by one salesperson who happened to be over 75 years old. So, be aware of your concentrations and your ability to hang onto them and transfer those.

—Jeffrey A. Ford

You start out as a seller, always, as a buyer. You have to sell yourself and establish trust, and then get to where you can flip the switch and become the buyer.

—Bob Petrini

Entrepreneurs are very proud, ‘Hey, I built this company with everything I did here.’ Just bottle all of that up when the investor comes and make sure, if anything, you downplay your role.

—Matt Harnett

 

Timing matters

During due diligence, mostly all that can happen is bad things. The company can fall off in performance, you can find terrible issues. So not that you want to rush to get a deal done or you want to see these issues fall out, but you have a finite period where you can go in and evaluate these things.

—Doug Brosius

The one thing that I would have done differently would be sense where the seller was and make direct contact there more and push the process to the extent I could.

—Bob Petrini

 

They’re professionals for a reason

If you’re really trying to grow it, grow value into a larger enterprise, I think you’re smart to have an institutional investor. And if things get rocky, you’d like to know you’re dealing with an institutional investor that’s used to working through covenant issues, used to managing investments in good and bad times, is a good partner. Whereas, if you have a personality who is really emotionally attached to a business, things can get really sour really quick if he doesn’t get his interest payment.

—Matt Harnett

 

Red flags

At the end of the day, we are in business to put money to work. So, we don’t want to lose it, we want to get good returns. But don’t blow up a deal with 10 people on the phone if it’s really not an issue.

—Matt Harnett

Letting the process happen is probably the wrong approach. It’s like, if you’ve ever fly fished, it’s catching that trout. Don’t let too much line out. Don’t pull it too tight. Either way, you’re going to lose the seller.

—Bob Petrini

We have observed, over the years, that no matter what the contract says, no matter what the indemnifications say, too many of the employer-related items or customer-related items end up being borne by the buyer. Even if the agreement says the seller was responsible, you’re still going to pay the PTO costs or the sales tax that wasn’t collected from the customers.

—Jeffrey A. Ford

 

Seller financing in moderation

A lot of these transactions where the seller is willing to take seller financing, either doesn’t want to let go of the business or can’t quite get the value anywhere else or there’s just some dynamic going on that says, ‘Hey, maybe this isn’t the right situation or maybe we are approaching this situation the wrong way.’ So again, our bias is always seller financing is good, it’s cheaper, but it has to be manageable.

—Doug Brosius