BUYING A BUSINESS - ADVICE FOR THE FIRST TIME BUYER/ INVESTOR

Written by Dave Kauppi


Continued from page 1

5.Network Network Network. A great way to improve your chances of successfully purchasing a business at a good price is to have an entree into a business that is not formally for sale. What I mean when I say thatrepparttar business is not formally for sale is thatrepparttar 104038 owner has decided that he wants to exit and has shared that information with a few close advisors, but has not engagedrepparttar 104039 services of an M&A firm or advertised on one ofrepparttar 104040 popular Business for Sale Web Sites. Putrepparttar 104041 word out to your network of professionals, industry sources, trade associations, vendors and suppliers, etc. Utilizerepparttar 104042 same preparation as described above and hand out your materials. Your banker, your lawyer, your financial planner and all of their associates are great sources of businesses for sale. Remember, if you do not establish your credibility with them in your preparation, they will not risk their credibility with another client through an ill-advised introduction. The good news from this approach is that you may be able to purchase a good business at a bidder of one price without price pressure from other buyers. If that seller’s trusted advisor brings you in,repparttar 104043 chances of this happening improve significantly.

6.How serious are you? Lots of individual buyers will pay a broker or intermediary a success fee based on a percentage ofrepparttar 104044 purchase price. The most serious buyers, however, pay buy side engagement fees as well. This is a fee usually ranging from $2,000 to $7,500 per month paid torepparttar 104045 M&A professional to formally search for you outside ofrepparttar 104046 networking only approach they would take for no engagement fees. Corporations in acquisition mode almost always operate this way. The benefit to this approach is thatrepparttar 104047 intermediary will expandrepparttar 104048 universe of candidates to those companies that fit your buying criteria that are not for sale. It is a lot of work to compile databases and try to break throughrepparttar 104049 difficult barriers to reach an owner that was not contemplating a sale and convincing him to entertain this process. Our objective is to buy his company asrepparttar 104050 only competitor. If we can do that,repparttar 104051 transaction price will generally be 20% below a business that is formally for sale, represented by a professional, and getting many interested buyers. Saving you $1 Million onrepparttar 104052 purchase of a $5 Million business certainly will justify any monthly fees and success fees an M&A professional would charge. The corollary to this is if you are a business seller, and you do not engage a professional, you most likely will leave that 20% premium onrepparttar 104053 table.

Most individual buyers are engaged inrepparttar 104054 buying process with either no current income or very limited consulting income. In other words, buying a business is their full time job. While one operates in buying mode, they are working for no income. The longer that buying process takes,repparttar 104055 greaterrepparttar 104056 erosion of their financial resources. It is inrepparttar 104057 buyer’s interest to not only purchaserepparttar 104058 right business atrepparttar 104059 right price, but to compressrepparttar 104060 amount of time it takes to completerepparttar 104061 process. Implementing one or several of these recommendations should help you buy smarter and faster.

Dave Kauppi is a Merger and Acquisition Advisor with Mid Market Capital, Inc. MMC is a business broker firm specializing in middle market corporate clients. We provide M&A and divestiture, succession planning, valuations, corporate growth and turnaround services. Dave is a Certified Business Intermediary (CBI), a licensed business broker, and a member of IBBA and the MBBI. Contact (630) 325-0123, davekauppi@midmarkcap.com or www.midmarkcap.com.


SELLING YOUR TECHNOLOGY COMPANY - WHY EARNOUTS MAKE SENSE TODAY

Written by Dave Kauppi


Continued from page 1

8.The improving market provides bothrepparttar seller andrepparttar 104037 buyer growth leverage. When negotiatingrepparttar 104038 earnout component, buyers will be very generous in future compensation ifrepparttar 104039 acquired company exceeds their projections. Projections that look very aggressive forrepparttar 104040 seller with their pre-merger resources, suddenly become quite attainable as part of a new company entering a period of growth. An example might look like this: Oracle acquires a small software Company B that has developed Oracle conversion and integration software tools. Last year Company B had sales of $8 million and EBITDA of $1 million. Company B had grown by 20% per year. The purchase transaction was structured to provide Company B $8 million of Oracle stock and $2 million cash at close plus an earnout that would pay Company B a % of $1 million a year forrepparttar 104041 next 3 years based on their achieving a 30% compound growth rate in sales. If Company B hit sales of $10.4, $13.52, and $17.58 million respectively forrepparttar 104042 next 3 years, they would collect another $3 million in transaction value. The seller now expands his client base from 200 to 100,000 installed accounts and his sales force from 4 to 5,000. Those targets should be very easy to hit. If these targets are met,repparttar 104043 buyer easily financesrepparttar 104044 earnout with extra profit.

9.The window of opportunity inrepparttar 104045 technology area opens and closes very quickly. An earnout structure can allow bothrepparttar 104046 buyer and seller to benefit. Ifrepparttar 104047 smaller company has developed a winning technology, they usually have a short period of time to establish a lead inrepparttar 104048 market. If they are addressing a compelling technology gap,repparttar 104049 odds are that companies both large and small are developing their own solution simultaneously. The seller wants to developrepparttar 104050 potential ofrepparttar 104051 product and achieve sales numbers to drive uprepparttar 104052 company’s selling price. They do not haverepparttar 104053 distribution channels,repparttar 104054 resources, or time to compete with a larger company with a similar solution looking to establishrepparttar 104055 industry standard. A larger acquiring company recognizes this first mover advantage and is willing to pay a buy versus build premium to reduce their time to market. The seller wants a large premium whilerepparttar 104056 buyer is not willing to pay full value for projections with stock and cash at close. The solution: an earnout forrepparttar 104057 seller that handsomely rewards him for meeting those projections. He getsrepparttar 104058 resources and distribution capability ofrepparttar 104059 buyer sorepparttar 104060 product can reach standard setting critical mass before another large company can knock it off. The buyer gets to market quicker and achieves first mover advantage while incurring only a portion ofrepparttar 104061 risk of new product development and introduction.

10.You never can forget about taxes. Earnouts provide a vehicle to defer and reducerepparttar 104062 seller’s tax liability. Be sure to discuss your potential deal structure and tax consequences with your advisors before final negotiations begin. A properly structured earnout could save you significant tax dollars.

Smaller technology companies have many characteristics that make them good candidates for earnouts in sale transactions: 1. High growth rates, 2. Earnings not supportive of maximum valuations, 3. Limited window of opportunity to achieve meaningful market penetration, 4. Buyers less willing to pay for future potential entirely atrepparttar 104063 sale closing and 5. A valuation expectation far greater than those supported byrepparttar 104064 buyers. It really comes down to how confidentrepparttar 104065 seller is inrepparttar 104066 performance of his company inrepparttar 104067 post sale environment. Ifrepparttar 104068 earnout targets are reasonably attainable andrepparttar 104069 earnout compensates him forrepparttar 104070 at risk portion of transaction value, a seller can significantly improverepparttar 104071 likelihood of a sale closing andrepparttar 104072 transaction value.

Dave Kauppi is a Merger and Acquisition Advisor with Mid Market Capital, Inc. MMC is a business broker firm specializing in middle market corporate clients. We provide M&A and divestiture, succession planning, valuations, corporate growth and turnaround services. Dave is a Certified Business Intermediary (CBI), a licensed business broker, and a member of IBBA and the MBBI. Contact (630) 325-0123, davekauppi@midmarkcap.com or www.midmarkcap.com.


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