Small Business Information

Attributes Of Companies You Don't Want To Buy!

There are no "rules of thumb" in the pursuit of companies tobuy. Each purchase opportunity has to stand on its own merits.There are, however, attributes of acquisition candidates thatneed to be defined for what they really are before additional,limited resources are put at risk in a potential deal. It isabsolutely critical for any proactive business buyer tounderstand, consider and deal with specific businesscharacteristics that add unnecessary financial risk to theinvestment opportunity at hand.

The purpose of this article is to highlight characteristics ofacquisition candidates that you should consider absolute "dealkillers". These are brought to your attention because it isvery common and natural to get so far down the due diligencetrail on a company you have worked so hard to find, that ISfor sale, that is right in your industry "comfort zone" andnot see the inevitable financial disaster looming down theroad because you became "blind" to what the future businesspotential will be, versus the potential of what you think itcould be!

Buying Quality Businesses is a "Number's Game"

There is a direct relationship between perceived value ofsomething that is in very limited supply and the time andeffort you have invested to find it. Quality businesses, withextraordinary growth potential, that are for sale, are likethe proverbial "Diamond in the rough" or "Needle in thehaystack" analogies ? it takes removal of tons of dirt andmounds of hay to find what you seek!

In any proactive business acquisition pursuit, a seasonedbusiness buyer will tell you that finding viable companiesthat can be purchased for reasonable terms is a "number'sgame". Thousands of company candidates, that lead to hundredsof contacts, which lead to ten's of acquisition conversations,that hopefully lead to one company purchase!

Going into any business acquisition effort, knowing what ittakes to find and eventually secure a business purchase dealhas a dramatic affect on the definition and your eventualallegiance to your business purchase criteria. If yourpurchase criteria are too "tight" and your commitment toorigid to that criteria, you may quickly feel you'll never findyour "ideal" company to buy!

Absolutely, Unquestionably, No Brainer, "Deal Killers"

Attempting to find and qualify businesses to buy is aniterative and complex process. Each opportunity eventuallystands on its own merits and purchase compromises will prevailbecause it is unrealistic to think you will find the exact,"perfect" acquisition opportunity. There are, however,business attributes, like these listed below, that are bestleft with the current company owners:

  • The sellers have previously terminated two or more purchase contracts
  • The current business owners have no clear, compelling reason to sell
  • The sellers cannot provide basic financial information
  • The business is completely dependent on one key employee
  • The seller will not provide any form of "earn-out" based on future company performance
  • The business relies on limited natural resources to produce its product or service
  • Improper application of the company's product/ service = major $ liability
  • The company has not been profitable for the last 3 years
  • Pending significant legislation possibly impairs future growth
  • Key personnel will not sign employment contracts or non-compete's
  • Payment on acquisition debt exceeds 50% of after-tax profits
  • There is an insufficient pool of labor or talent to grow the business
  • There is no technical or knowledge barrier to entry for the targeted business niche
  • Key patents are about to expire
  • Only one supplier can provide a key product/ service ingredient
  • One customer equals greater than 20% of total annual sales revenues
  • A viable competitor offers ALL the products and services your customers need
  • There is no customer purchase loyalty
  • The overall demographics of your targeted market(s) are negative
  • Extraordinary product/ service warranties are firmly established within the industry
  • The product must be manufactured overseas to effectively compete
  • Targeted, primary markets have had no growth the last three years
  • There is existing or pending, noteworthy legal encumbrances against the company
  • You determine the current business owner lies to you about "small" details

Assuming you have clearly defined and documented your criticalBusiness purchase criteria well in advance to starting yourbusiness acquisition program, you will often start tocompromise your purchase criteria as you continue to investmore time and money to find your "ideal" acquisitioncandidate. This is a "cardinal sin" in merger and acquisitionpursuits. Compromising your purchase criteria is naturaltendency, but ultimately a fatal mistake!

The importance of defining, understanding and truly committingto your critical company attributes is most important duringthese frustrating times. The most effective business buyersare disciplined business buyers. They are those who candecisively deal with uncovered negative company attributes andimmediately move on to the next purchase opportunity

About the Author:Mark Smock is President of,the FIRST international business buyer directory of its kind.Business Buyer Directory provides a non-traditional means forproactive business buyers to locate businesses for saleworldwide that meet their exact registered purchase criteria.

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