You’ve Just Cashed Out and Not Ready to Call it Quits

Posted by Andrea Wolf on Aug 25, 2016 05:00:00 AM

Topic: ALL

Business meeting discussing a contract

Over the past months, I’ve had numerous conversations with executives who have cashed out and are now actively looking to acquire an established business.  With a limited number of high-quality companies for sale, and with strategic buyers and private equity firms sitting on record levels of cash, it is no secret that it’s a seller’s market, and buyers willing to pay premium sale prices still remain plentiful. 

This scarcity of supply has left many on the acquisition search thinking “if I cast a big and broad enough net, I’m bound to catch something.”  While this approach may work for a select few, it more often than not will lead to an exhaustive search, with many of your identified ‘catches’ bogging you down and ultimately being rejected because they don’t fit your criteria.  So, how do you compete and succeed in your acquisition search, keep your day job, and not get burnt out in the process?  

  1. Set Reasonable Expectations with Regard to Timing.  A “diamond-in-the-rough” company is not going to come knocking at your door tomorrow.  Initiate conversations with the right advisors – reputable accountants, attorneys and bankers so they will keep you in mind and inform you if they hear of opportunities, and are ready and able to act quickly should a prospect arise.  Research private equity groups and investment banks that focus on companies which fit your criteria.  It may likely take at least a year just to find the right opportunity, and once a sale process has been initiated it can take at minimum, an additional six to nine months to close.  Be persistent, patient, and don’t get frustrated. 

  2. Focus on a Specific Industry.  Let’s face it, if you’ve been in the steel industry for the past twenty-five years acquiring a company in the plastic injection molding space is probably an unlikely move.  Your specific industry experience and expertise will resonate more effectively with contacts and make you a more desirable candidate than casting a broad industry net (i.e. “I am looking for industrial companies.”).  And don’t worry about eliminating potential opportunities with this approach – think of it more as weeding out companies that aren’t a fit and have a slim chance of making it past the finish line anyway.  

  3. Differentiate Yourself and Clearly Articulate your Value-Add.  Do you have a rolodex of contacts within your industry?  Are you a turnaround person that has history of implementing operational and efficiency improvements, who doesn’t mind a company with a little ‘hair’ on it?  Have you been through an M&A process before?  Clearly articulate your message in the marketplace, both to establish credibility and help keep you ‘top of mind’ should an opportunity arise that would be a good fit.

  4. How Much Money are you willing to Invest in the Company?  Most transactions require at least a 20% - 40% equity injection.  Even if you decide to partner with a private equity fund, they will require you to have ‘skin in the game.’  Although purchase price multiples will vary by industry and the individual business itself,  knowing how much you are willing to invest will allow you to eliminate opportunities that are too large, and again, help you clearly articulate you message in the marketplace.  Should an opportunity arise, be sure to talk to a lender sooner rather than later so you have a sense of the amount of financing available for that potential transaction.

It’s a competitive marketplace.  You need to deploy your time and resources in the most effective manner possible.  Spend the time now to engage conversations with the right advisors and do the research upfront to help develop a target list that fits your investment criteria.  The more focused and prepared, coupled with your ability to clearly differentiate yourself in the marketplace, the greater your chances of success.