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Buying a Business as an Investor


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The professionals have a continuous deal flow. Buying a business as an investor is an ongoing process by facilitating:

- local brokers
- national brokers
- international brokers
- banks
- other business owners
- IHK
- local business

Having rules and finding the opportunity cost effective is the key to it. And you need a team of bankers, financial accountant, and lawyers on your team.
An opportunity without a structure ends up in a chaos. The problem is, most business owners started their business because the wanted to be free. They hate structure!

Most people are not able to exit it tomorrow, because they did not plan it that way. So most offers are made up to look pretty only on the surface. Some of them, are not even like that. They look really ugly.

Good things to think about due diligence:
Are the earnings real?
Are the earnings cash?
What is the free cash flow?
Will earnings continue?
What could disrupt the future stream of earnings and how can I reduce this risk?

Utilize 3 way looking on the financial statements:
- in $
- % of sales
- $ per unit

Use the multiplier Guide and adjust it for risk and growth.
To estimate the risk, think about:
What drives the number of units sold?
What is the critical driver for price / gross margin per unit?
What drives repeat business?

If buying a business, that

Long-term investments as a minority, most of those investors are unhappy in the long term.
The problem with it is, that we keep hearing about the exceptions. You cannot monetize it in a short time.

How to qualify people to hire? Use the Talent Map, see a white paper with 10 Questions
Company DNA: with a time horizon of 1-3 years
Role: Core competence => execution of critical drivers => Strategic Outcomes to serve the DNA
Candidate: Define 3 must have and 3 like to have

Before hiring an employee, describe the role. To define a role, start with a scorecard of the strategical outcome and re-engineer backward to the core competencies of the role.

Books about hiring people for your business
Jeff Smart: Who
Ram Jeram: Boards to lead

Is it better to buy one big business or some small ones?
To create wealth it is better to do one big one.
Creating several streams of income is a lifestyle issue.

Deal Structures
- seller financing 40-60% over 5-7 years, <6% with a personal guarantee, subordinated by the bank
- earn-out: the bridge for risk, contingency payment if .... then ...
To have the seller participate in substantial growth, customer, concentration, contract renewal, unreported revenue

Valuation Case Study

How to spell growth?
L E A R N

Due Diligence = Skeptical + Verify
- is it going forward
- Are the earnings and CF real? Have the owner sign an IRS4506 form, so that you can request this numbers from the tax office.
- Check for differentiation, disruptions, constraints that might come from Competition, Environment, Industry or Employees for the past and the future.

It has 4 components:
financial
business industry competition
management employees
legal liabilities keep some money back for it for a year. If nothing comes up, the seller get the money.

The #1 priority after the acquisition, is to get everybody back to work. Drama always costs money. Give the employees a good feeling of stability. Use the tool from Kieth.

Due diligence is not
insurance policy
foolproof
a witch hunt
a substitute for intimacy
In addition to it, you need to build up a relationship with the seller.

If we are ignorant about the competition, we cannot express: here is what we do ... , here is what they do ..., if you want this, buy from us if you want that buy somewhere else. So reassure:
- you keep your job
-
Provide the speech:
The owner and I are aware, that he did not create the success of this company, but you did it.
I want to do more, better, louder, faster. I don't want to bring in, new people. If you keep doing your job, you don't get fired. All of you are a wonderful orchestra, but if you lay down your instrument, I need to get a new musician. But If you keep on playing, you gonna have a safe job.

Discuss with the management
What are 3 things that should not change?
What 5 things need to be changed?
What do you expect from management?
Should management expect the same from you?
What are the 5 things that could get you fired?
What are the top 5 things you would do to would guarantee you would get a raise or get promoted?

Evaluating personnel
- Quitters, sob stories, blackmail = those people are usually a culture mismatch and would be going anyway. So if someone says: I want a raise or I am going. let them go. The problem is never the money the people want, but it is a matter of the size of their job.
- There must be at least one superstar. He needs to superb compensation, attention, appreciation, and honor. Let them feel that they are something special. Surprise money is the biggest honor. Do it on an irregular basis.
- Cultural Saboteurs, get rid of them. Sometimes a public hanging is a good idea, to make sure everyone knows what is not tolerated. First, try to coach them, and make the consequences clear.
Get stability, even if broken! Don't try to fix it in the first place. The solid machine on a heap of shit can be productive.
- Verify management with zeroriskhr.com it is far beyond DISC Profile

Financing
-

liability
accounts payable
bank debt
mezzanine financing is a subordinated debt (cash flow SBA). the seller financing is a kind of that.
preferred stock = private equity/VC, or money of family members

equity
common stock (from friends and family)

SBA is a great way financing such deals, but only available in the US. It is from the state, so there comes a lot of paperwork with it.

Where to find money
- networking friends family
- seller
- suppliers
- customers
- increase purchase price for favorable or extended term
Beware: Too much debt & inadequate reserves are the only reason to go bankrupt!

Post Purchase Priorities
- Communicate
- Divers of Value / Storage Tanks
- Key Relationship
- Employee culture and customer focus
- Measurements and accountability only amp it up slowly, because people get very honky about it, if not used to it. They might come to the point, there are easier places to work.
- focus on protecting and nurture stability
- develop 30/60/90 day plan before the purchase
- fix problems, not symptoms
- most problems are people problems

Common difficulties
- prolonged transition
- poor communication
- lost productivity
- lost productivity
- internal power struggles
- lack of customer focus
- lack of critical drivers

Buying a Business as an InvestorBuying a business is like hiring an employee. It is misleading because it is ongoing. It is not like closing, it is how to employ it, by feed, own, nutritious, maintain, ... otherwise, it ends up with the problems above. You need to take the lead and coach them to get up to speed. What needs the employees of the bought business need to know, to get out of the threat and back to work.

After getting stability (90 days), in the first 6 months, it is building people and culture. Be in the business for 90-120 days every day. During that time I need to give up something else.

There is a difference between earnings and cash.
The example has a negative cash flow.
If there is no free cash flow, you cannot pay any credit back!

How to calculate receivable- and inventory days? See page 60

Action Items
- develop your rules
- define target industry, size, region)
- start researching
- start dating for your deal flow
- start raising money/financing
- snapshot score sheet

Critical rules for success, see Page 98
- keep deal flow
- a business is as valuable as its future stream of earnings
- most businesses are not perfect, to fix it you need optics
- business requires skills and tools
- get to know the critical drivers
- what can kill the business
- don't fall in love with the product, but the profits
- don't be in but EN the business. EN stands for ENgaged

At the end ask for coaching, how can we learn. So don't ask for feedback, rather for how to improve.