Acquisition entrepreneurship is a way to combine the playbooks of both the investor and the entrepreneur, with the potential to gain the best of both worlds. By purchasing a company, then growing it, you can gain ownership of an existing firm and use your entrepreneurial abilities to grow it.
With careful planning and shrewd decision-making, the returns can be exceptional, while the risks are relatively low. Nonetheless, there are plenty of pitfalls awaiting the unwary acquisition entrepreneur. This article will provide 10 tips on what to look for and how to succeed.
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1. Think of your business as an investment vehicle
According to Thomas Stanley and William Danko, authors of the best-selling book, The Millionaire Next Door, effectively 100 percent of non-retired millionaires who live in the United States own their own business(es). Owning your own business has two major advantages: It is an opportunity to provide value through products and services, and it’s arguably the best way to build real wealth.
To be clear, owning a business is not a guarantee of wealth. It’s also unwise to acquire a company purely for financial gain. However, a successful business can still be a great investment vehicle.
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2. Build in a margin of safety
Warren Buffett, who is widely considered one of the most successful investors in the world, practices what’s called value investing. Buffet is notorious for investing only in offerings he understands, focusing on tangible assets and earnings, and buying when the price is favorable. The built-in assets, infrastructure and earnings of the company in this case create a margin of safety for the investor.
This doesn’t mean that you should aim to underpay for companies that you acquire. It does mean, though, that you can and should do your sums, understand what a business is truly worth and look to invest when the market is in your favor.
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3. Understand the upside potential
Having a margin of safety is critical for protection if the worst should happen, but that’s not why people invest. People invest because of the upside potential available in an investment. Because acquisition entrepreneurs are active in their business, they can use their time, commitment and skill set to grow revenue and increase earnings.
If, for example, you were attempting to increase your appreciated value in real estate, there’s not much you can do. The market moves, and it takes the value of the home with it. The ability to buy, then build value gives acquisition entrepreneurs an advantage over all other investment classes.
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4. The three A’s
Most people begin looking for a company to acquire in the wrong way: By thinking about which industry to target. Even most intermediaries start with this question: What type of business do you want to find? Rarely is this the right place to begin.
Successful acquisition entrepreneurs don’t treat acquiring a business like ordering off of a menu. They think about aligning their attitudes, aptitudes and actions. In other words, they determine their temperament, understand what they’re good at and consider what specific activities they want to spend their day doing. Only then do they look for opportunities that match a profile.
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5. Define your preferred identity profile
Instead of looking for any business in a specific industry, consider what type of company you’re best suited for. These categories aren’t exhaustive, but most businesses fall into one of them.
Do you want an eternally profitable organization in an industry that’s unlikely to be disrupted? Are you more interested in purchasing a failing business, perhaps at a level below its liquidation price, and effecting a turnaround?
Another option is the high-growth business, which looks appealing but can represent a risk if the level of growth proves unsustainable.
Finally, there’s the platform business, which represents a foundation for future growth.
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6. Identify the path to growth
When you look at a company, try to find what it brings to the table. Look for opportunity in the company and in the industry. Identify how good the company is at executing on an opportunity — what it has and what it lacks.
If your strengths and goals are a good fit for executing the growth opportunity and potentially unlocking its hidden value, you’ve just found your platform. First, identify your strengths, then match it to the growth opportunity the potential acquisition offers. When the match is right, stop looking and move forward.
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7. Recognize your limiters
You need to identify any limiters that apply to your search. These consist of anything that you absolutely don’t want to consider. This will bring focus to your activity by filtering out anything that’s not worth considering.
For example, are there any industries you never want to work in? The most common limiter is geographic preferences. Are you okay moving wherever the best opportunity is? Or, do you want to stay in your current location? If you need to work around where you are, how far are you willing to commute? Alternatively, are you looking for an online business where the company is often completely relocatable?
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8. Create a target statement
Only 10 percent of potential buyers ever succeed in acquiring a company. That’s because they don’t take the time to figure out what they’re really looking for. Are you looking for a company that creates products, delivers services or acts as a distribution hub? Which of these suits your attitude, aptitudes and actions?
Think about how large a company you’re looking for based on your capital and aspirations. Couple this with the work you’ve already done defining your preferred opportunity profile and identifying any potential limiters. When you’ve done this, you will have a clear path to finding the right company.
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9. Skip the internet
Most people start searching for a company to buy by finding a popular site like bizbuysell.com and spending an inordinate amount of time (often during leisure time) passively reviewing the listings. Whatever you do, do not do this.
Instead, think of finding the right company like finding the right job. Set a folder aside for listings, start a spreadsheet and record industry, location, revenue, asking price and any other critical information. When you go online, it’s to conduct serious research, not to browse aimlessly for companies.
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10. Get upstream
To maximize your chances of finding the right company for you, you need to go where the deals are. This means connecting with as many brokers as possible, meeting them and impressing them with your preparedness.
Brokers work mainly or exclusively on commission, so they want to know that you’re serious before they invest time in you. Showing up with a clear idea of what you’re looking for, a timescale and an idea of how to fund your venture demonstrates that you’ve taken the time to plan ahead. This hugely increases the chances that they’ll give you access to the most interesting opportunities.
Walker Deibel is an entrepreneur and investor who has co-founded three startups and acquired seven companies. He is also a certified adviser and former SEC-licensed stock broker.
This article was adapted from Deibel’s book Buy Then Build: How Acquisition Entrepreneurs are Outsmarting the Startup Game and Unlocking Trillions in Value, and syndicated by MediaFeed.org.
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