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Are You Ready For The Call? (Part 1 of 7)

12 December 2007 No Comment

Are You Ready For The Call?

It may have already happened to you.

You’re at your desk one day, the phone rings, and after a brief greeting the voice at the other end says “I want to buy your company”. . .

The very next thing you say will either make or lose you millions of dollars.

Lots of business owners are getting calls like this every day. There are more firms than ever trying to buy good profitable companies in every industry.

Why is there so much interest in acquiring private companies now?

Over the last several years billions of dollars have been raised by buyout firms who now need to invest it. Corporate America has been banking profits at record rates and is now looking for acquisitions, both to continue growing and to get their excess cash to work so they don’t become takeover targets themselves. All told, there is approximately two trillion (that’s Trillion, with a ‘T’) dollars in the US looking to be invested.

In addition to the private equity groups (PEGs) and corporations (the S&P 500 companies alone account for about a third of that two trillion dollars) add venture capital firms and hedge funds. VCs are having a harder time finding good investments where they can get enough of the company and have started looking for more companies that are already up and running. They still want lots of upside in their investments, now they also want a running start to reduce their risk. With the volatility in the stock markets, hedge funds, which are just unregulated investment partnerships, are also looking at operating companies.

And that’s just the US. The rest of the world looks at the declining dollar and sees assets in the US on sale. Foreign buyers are now participating in as many as half the transactions in certain market segments. Add another trillion dollars.

This all sounds like great news, right? With all these buyers and all this money, getting a good price for my company should be simple and fast. Maybe for a select few. For everyone else it’s actually harder. Why?

Because these buyers are pros.

They’re not the friendly competitor down the street or in the next town who knows the local market and customers. They’re not the management team who has worked with you for years. Without that familiarity they need to be much more analytical, dig deeper, and make sure you measure up. These buyers aren’t just looking in your neighborhood; they’re looking at other companies just like yours in different areas as well as other businesses in different industries. You are competing for their dollars against companies you’ve never heard of, in markets you don’t know, and in industries you’ve never considered.

Buying companies is what they do. It’s all they do. And they’re very good at it. Collectively these buyers are probably the smartest, best financed group of business people that you’ll meet, and they’re on the opposite side of the table from you. If this were just about negotiation then it would be much simpler. Negotiation is jockeying for position with what everyone knows are the facts. Maybe you’re trading off price vs. terms, or you know you’re about to land another big contract. Negotiation happens once the ground rules have been established and the game is underway. Negotiation is not where you’re going to make an extra million dollars. If you’re counting on just negotiating well, you’ve already lost it.

What we’re talking about here is changing the ground rules long before the negotiations start. It’s about you making sure that what they’re buying is more valuable – and that they know it at the outset. If you haven’t been working on this long before the phone rings you’ll never catch up with some slick negotiating techniques.

To fully understand this dynamic you need to know the five components of value that anyone looking to acquire a business sees. Once you know those, you’ll be able to make decisions now as you’re running your business day to day that will move your company in the right direction. This is not extra work on top of what you’re already doing. Any well run business is based on these fundamental principles and knowing these actually makes it easier to make decisions, operate your business, and grow both revenue and profitability.

The first three can be done completely internally, just by working on the company itself. The last two are related to the external market – those firms that may be acquirers of your company – and the process that you use to reach them. They are not individual calculations you can add up at the end; you need to work on your company as a whole to realize all of them.

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