First of all, please recognize that there is tremendous competition at Main Street Level (transaction value under $1 Million) for business acquisition. This phenomenon is result of down sizing and early retirement of mid level and senior executives in their forties and fifties. These people have exited with a war chest of a half million dollars and have vowed to never again be a victim of a corporate restructuring. They want to control their destiny, run their own show, buy and run a business. Most of these people are looking to buy a job.

You and 10 million other buyers:

I am looking to buy a niche manufacturer or distributor with $3 to $10 million in revenue and $500 K to $1.5 Million EBITDA and I don’t want to pay more than a 3.5X multiple. I have about $350 K of my own to put into deal and I have investors lined up for another $1.5 to $2 Million. Pleeeeeeese! Do me a favor. When you have a first meeting with an intermediary and you deliver this message, make sure you are on first floor. I hate to see my colleagues leaping from tall buildings.

Do your Homework:

There are several things you can do to improve your chances of getting and keeping attention of a broker.

1.Be Specific. In example above, category was so broad that you come across as being not focused, not prepared, and wishy-washy. Translation – this guy is a long way away from pulling trigger. Your best bet in getting support from investors, friends and family, and bankers is to purchase business you were employed by or a very close competitor. Specific industry experience improves potential of acquired company surviving and servicing debt. Pick out a sample company of size range and industry you are targeting and present that as an example of what you would like to acquire. Take it a step further and be prepared to articulate your area of expertise and how you would apply that to make this sample business perform at an improved level. This should be a one to two page summary document. Now that’s focus.

2.Funding Preparation. Know exactly what you can put down on business. If you are not prepared to supply your broker personal financial statements, you probably will not get any help. Go and have specific discussions with friends and family (take your sample business and your performance improvement plan). Present your expected returns/equity percentages and ask them what they are willing to commit. A signed letter from these folks describing their backing is a very powerful attention grabber. Do not assume anything. Know your support level before you and everyone else does all work to find a qualified acquisition candidate only to find out your investors did not materialize.

3.You are selling yourself. In a sense you are interviewing for a job. Bring materials that support why you are qualified for job. A resume is essential and written references are good to have. Remember, most of these transactions will require former business owner to carry a seller note. They want to understand exactly to whom they are lending and risks associated with servicing this debt.

1.Buyers acquisition multiples are at pre 1992 levels. Strategic corporate buyers, private equity groups, and venture capital firms got burned on valuations. Between 1995 and 2001 premiums paid by corporate buyers in 61% of transactions were greater than economic gains. In other words, buyer suffered from dilution. During 2002 multiples paid by financial buyers were almost equal to strategic buyers multiples. This is not a favorable pricing environment for tech companies looking for strategic pricing.

2.Based on bubble, there is a great deal of investor skepticism. They no longer take for granted integration synergies and are weary about cultural clashes, unexpected costs, logistical problems and when their investment becomes accretive. If seller is willing to take on some of that risk in form of an earnout based on integrated performance, he will be offered a more attractive package (only if realistic targets are set and met).

3.Many tech companies are struggling and valuing them based on income will produce some pretty unspectacular results. A buyer will be far more willing to look at an acquisition candidate using strategic multiples if seller is willing to take on a portion of post closing performance risk. The key stakeholders of seller have an incentive to stay on to make their earnout come to fruition, a situation all buyers desire.

4.An old business professor once asked, “What would you rather have, all of a grape or part of a watermelon?” The spirit of entrepreneur causes many tech company owners to go it alone. The odds are against them achieving critical mass with current resources. They could grow organically and become a grape or they could integrate with a strategic acquirer and achieve their current distribution times 100 or 1000. Six % of this new revenue stream will far surpass 100% of old one.

5.How many of you have heard of thrill of victory and agony of defeat of stock purchases at dizzying multiples? It went something like this – Public Company A with a stock price of $50 per share buys Private Company B for a 15 x EBITDA multiple in an all stock deal with a one-year restriction on sale of stock. Lets say that resultant sales proceeds were 160,000 shares totaling $8 million in value. Company A’s stock goes on a steady decline and by time you can sell, price is $2.50. Now effective sale price of your company becomes $400,000. Your 15 x EBITDA multiple evaporated to a multiple of less than one. Compare that result to $5 million cash at close and an earnout that totals $5 million over next 3 years if revenue targets for your division are met. Your minimum guaranteed multiple is 9.38 x with an upside of 18.75x.

6.Strategic corporate buyers are reluctant to use their devalued stock as currency of choice for acquisitions. Their preferred currency is cash. By agreeing to an earnout, you give buyer’s cash more velocity (ability to make more acquisitions with their cash) and therefore become a more attractive candidate with ability to ask for greater compensation in future.