The Four Components that Govern the Business Acquisition Decision Process

Mar 3, 2015

Federal Reserve Chairwoman, Janet Yellen, is quoted as saying “People stop buying things, and that is how you turn a slowdown into a recession.”

Mergers & acquisitions involving privately held companies slowed down significantly between 2009 – 2011 in the Pacific Northwest when consumer confidence relating to the economy declined and financial institutions demonstrated reluctance to finance transactions. Today, consumer confidence is strong and ample capital is available to facilitate acquisitions. This combined with a large number of “baby boomer” demographic entrepreneurs desiring to sell companies with increased market share, revenue, and profitability due to prudent business practices and the elimination of weaker competition during the recession created a robust marketplace for transactions in 2014 that has continued into 2015. It is anticipated that this trend will continue for multiple years into the future, as the components that have created the market environment are not anticipated to change significantly.

Parties interested in acquiring privately held companies approach IBA on a regular basis seeking the opportunity to review our representation projects shortly after they enter the business opportunity market knowing that the best acquisition opportunities will often only be on the market for a few weeks. Some of these parties seek companies in specific industries served by IBA like veterinary medicine, but a majority of the parties are fairly industry agnostic seeking opportunities with strong business fundamentals and potential for growth. These parties complete confidentiality agreements, are financially prequalified, and asked to define their acquisition criteria prior to being included in our buyer database.

An acquisition criterion has four primary components that will determine which business opportunities will be seriously considered for purchase by a business buyer. The first component is the amount of capital available for the acquisition. The amount of capital is traditionally a combination of liquid funds and capital available from the lending community and private investors. The second component is the geographic areas that a buyer will consider for acquisition. Traditionally, a greater number of buyers are interested in acquisition opportunities in the metropolitan areas of Seattle, Portland, and Anchorage than in companies based in rural communities. Geographic preference is a criterion that is difficult to modify from a professional sales perspective because residence preferences of executive management and commute time acceptance are decisions that are frequently made for emotional rather than business reasons. This market dynamic often results in value propositions being available for acquisition in rural locations that offer more favorable acquisition terms and a higher return on investment opportunity for entrepreneurs.

The third component of an acquisition criterion is industry. It is our recommendation that a party looking to acquire a business keep this element of their acquisition criteria as general as possible for two reasons. First, it is prudent to look at the maximum number of business opportunities when evaluating potential acquisitions. Second, we cannot order inventory and can never predict which companies will enter the market in a given year. IBA represents businesses serving niches profitably each year that we have never represented previously. We have successfully sold companies as diverse as pathology lab software companies, mlyar & latex balloon distributors, and environmental chemistry audit firms.

The final component of an acquisition criterion is cash flow or EBITDA. We have sold companies that are turn around opportunities with limited cash flow and businesses with numerous years of seven figure profits. An entrepreneur should define the minimum cash flow desired for an acquisition when establishing which opportunities to review to facilitate achievement of short and long terms return on investment goals.

Ultimately, a business buyer will employ more sophisticated criteria than four outlined. However, defining objectives regarding capital injection, transaction size, location, industry, and profitability will allow a buyer to quickly assess acquisition opportunities without expending unnecessary time, energy, and resources.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation in terms of successfully negotiating transactions that are “win-win” in an environment of full disclosure between the parties.