Considering Buying a Business? Initial Considerations

Business man flying from buying a business

Acquisitions may be the means to help your business soar. — Image by © Royalty-Free/Corbis

Now may be an excellent time to buy a business. Yes, credit availability from larger banks has not returned to its pre-financial crisis days, but there are many small community banks and fintech (financial technology) start-ups that have stepped in to fill the gap. Currently, (and periodically over the last year) the stock market is roiling due to uncertainty regarding interest rates, China’s growth rate, and the potential of a floating Yuan (the Chinese currency). In addition, the sub-$30 oil prices, the dearth in natural gas prices and the continual drop in commodity pricing has impacted the markets. This has led to significant drops in the market valuations of publicly traded companies. This also impacts, albeit indirectly, the market values of private companies. Therefore, company valuations are trending lower than recent years. When you combine all of this, there may be some wonderful opportunities out there.

EBITDA

Let’s say a small business, a marketing company, would have sold for 4x EBITDA in 2013. (EBITDA is Earnings Before Interest, Taxes, Depreciation, and Amortization.) So if the marketing company had $500,000 in EBITDA, it would have sold for $2 million. Let’s assume that marketing company had 20% profit margins, minimal debt, and minimal physical or intangible assets. In that case, EBITDA would essentially equal net income or net profit (i.e., no real physical assets to depreciate, no intangible assets to amortize, no debt on which to make interest payments). With a 20% profit margin, the company had $2.5 million in revenue.

Company Changes

Jump to 2016. That same marketing company is still around as it was basically well run. However, the company serves several Fortune 500 companies that have changed their marketing initiatives to respond to changes in the digital market (online and mobile). The marketing company has lagged somewhat on changing to address these market changes. Therefore, it has lost some of its customers and others have cut back. The company has been able to bring on  new customers, but at lower revenues/customer due to its limited scope of services.

Buying a business blocks

The true price of the business is the price that both the buyer and seller agree on.

New Valuation

The marketing company’s revenues have dropped by 20% to $2 million. In this market, that’s a manageable drop. However, the well-managed company also lowered its overhead; therefore, it still has the same EBITDA margins (40%). (The company did not take on any new debt during the two years. It has essentially maintained its existing working capital line of credit) So EBITDA is $400,000 (40% *$2 million). Now, let’s assume that valuations  for marketing companies have dropped to 3x EBITDA. Thus, the company is now available for $1.2 million, which is a significant savings over the $2 million.

Since the company reduced costs and weathered the downturn, it is likely to rebound quickly in late 2016 -2017 as the economic and business uncertainty shakes out and energy and commodity prices bottom out (and perhaps begin to rise again). In addition, if you have an existing marketing business, you can expand the product/ service line to entice some former customers back and to sell more services to existing customers.

Owner Financing

In addition, many business owners /sellers are offering owner financing. I always say it’s possible to get owner financing but sometimes you really have to fight for it. (In other words, do a superb job of convincing the owner that owner financing in his or her best interest!) However, currently, more sellers are offering seller financing right out the gate. And remember, for larger companies with revenues of $8 or $10 million or more, small private equity funds still have money to spend.

Need Help?

If you or your company has or has considered an acquisition strategy, now is the time to pursue it. Need some help on determining or implementing that strategy, call me at 404-642-0509 or message me through the contact form. Otherwise, Go get ‘em, tiger!