Chapter 2

ACQUIRING A BUSINESS

Buying a business should be a thrilling experience, and, for many an entrepreneur, an acquired company becomes a source of wealth and personal satisfaction. Countless corporations of all sizes have wielded this method to further their development and growth.

At the same time, purchasing a company is a very tricky, high-risk matter that must be handled extremely carefully if the buyer is to avoid catastrophe. Captains of industry have gone down in flames because of disastrous buying decisions. Jill Barad of Mattel comes to mind, for example. When her 1998 decision to acquire The Learning Company turned out to be a financial debacle, Barad -- a highly admired businesswoman who'd risen to CEO of a world-class corporation at the age of 40 -- got the boot.

In this chapter, I'll provide an overview of the buying process, explain what motivates different types of buyers, offer criteria for choosing an acquisition target, and provide guidance on how to work with advisers.

Along the way, I'll spell out the most common pitfalls to help you steer clear of learning them "the hard way."

Those seeking to acquire a business have two main concerns: (1) to make sure the company they purchase is viable, that is, that it can continue to make money without requiring a massive overhaul, and (2) to not overpay. It's all too easy, when you're fired up by enthusiasm over a pending acquisition, to agree to shell out more than a company is worth and then find yourself cash strapped and tactically hobbled afterward, bemoaning your error. But as bad a mistake as that can be, a far uglier scenario is to buy a company and then discover that it had been cooking the books and is verging on insolvency, that it had given away all its intellectual property through previous contracts, or that you're holding the liability bag for unresolved legal wrangles. In such cases, the purchase could be your ruination.

This is why savvy, successful buyers spend a tremendous amount of time researching the marketplace. They know the value of patience. In fact, they may spend a few years until they find the right candidate to purchase. (Of course, they also know how to pounce when market conditions or other factors create sterling opportunities.)

And smart buyers, who also know the value of teamwork, rarely work alone. Rather, they build relationships with a variety of advisers, such as investment bankers, brokers, attorneys, and CPAs.

One more point: Wise buyers try to understand how sellers think and operate. That insight will make you a more effective negotiator and collaborator. (See chapter 1 to become familiar with "how the other side lives.")

Buyers of companies fall into three main types, each with its own buying criteria:

Entrepreneurial buyer. A person who wants to run his or her own business.

Strategic buyer. A company that buys another company for long-term reasons -- for example, to acquire new technology, obtain talented workers, or expand its customer base.

Financial buyer. A private equity firm that manages pools of capital to buy other companies and generate high rates of return. This type of buyer emerged relatively recently, in the mid-1970s.

Within these categories, of course, each individual buyer has particular criteria, depending on its needs and capacities. Despite these complex variables, however, the buying process should be essentially the same for all three groups. In this chapter, I explain the buying process in terms of how it applies to the three main types of buyers.