Buy Then Build: How Acquisition Entrepreneurs Outsmart the Startup Game

by Walker Deibel

The best buyers, however, understand that they too are entrepreneurs, just like the seller. The transaction will be completed within a few months after meeting the seller and then the buyer will be in the driver’s seat for the next four to forty years. Acting like an entrepreneur and not a venture capitalist during the interactions with the seller is the key to winning the seller over, getting the best deal outcome later, and behaving like the new CEO of the company—which you may or may not be, but that will be up to you and not them if you play your cards right.

Most potential buyers will give a short, passive description of their prior roles and maybe some accomplishments. They’ll say nothing about the seller’s business or what they, as buyers, are trying to accomplish. A good intermediary will pull this out during the conversation, but I encourage you to treat this first meeting like a job interview, where you are interviewing to be the CEO of the seller’s company. Remember, having the right attitude is a critical component of the CEO mindset. It is here where it will start to move from theory to action.

The odds of you meeting with more than one seller, or that a certain deal goes to another buyer, or doesn’t check out in due diligence, is all part of the process. For whatever reason, you might not end up working with this particular seller, but nothing has been lost by approaching the seller as an enthusiastic entrepreneurial partner rather than a cynical angel investor. The deal will work out (or not), but establishing yourself early on as a partner and “good buyer” will also win you great favoritism with the intermediary.

Research shows that a proactive, problem-solving, and cooperative approach toward a common goal results in the best outcomes for all parties, time and again. The common goal here, of course, is discovering the best possible deal for both sides. You are free to change your negotiation strategy at any time if you feel the situation has changed enough to support it. But remember, above all else, you don’t have to acquire the business. If you feel like you’re being lied to or taken advantage of (by the seller or the broker), I encourage you to run, not walk away.

Let me give you an example. When selling my own company, there were two things critical to me for the transaction. First, the new CEO needed to have the skillset and means to take the company to the next level during industry transformation, and second, every single employee needed to be retained at the same (or fair market) pay rate. The transaction value was important, sure, but I understood that would be determined based mostly on SDE and a multiple based on data—namely, comparative sales in our industry. If a buyer came in and didn’t pass the first two requirements, there would be no deal.

Obviously, you are surveying for big concerns, such as industry decline, powerful competitors moving in, or customer concentration. The seller will not be telling you this directly, but they will often be telling you indirectly. It is your responsibility as the future CEO of this company to determine the strengths, weaknesses, opportunities, and threats surrounding the company. The seller is the best source of information; however, if there is something keeping them up at night, they likely won’t bring it to the forefront on their own.

It is also your job to identify where the risks lie. Every business has risk associated with it. You as the buyer need to identify and either get comfortable with the risks involved (because they lie within in your skill set or are unlikely to occur) or determine the risks are too great and walk away.

Set the Tone Be optimistic around the opportunity but tremendously concerned about the risks involved. This will allow you to see the opportunity as it is.

Smoke Screens One way that has helped me do this is by asking the same question a few different ways at various points in the meeting (and repeatedly in future meetings with the seller). In doing so, I am usually able to pick up new information and round out a more complete, three-dimensional answer.

Element of Surprise I also like to move around a lot in my line of questioning. I find this throws off momentum around a certain topic. If the conversation starts leaning toward customer concentration in a specific geographical area, for example, they might be anticipating the next question will be around why that is. Ask it later and instead inquire about how the company is positioned within the industry or how much inventory they keep on hand. Then double back with your question around customer concentration. I find by progressing with a few different lines of questions simultaneously you can get the most honest answers because it throws off the logic behind what’s going to come next. Most people are always thinking about what they’re going to say next, so when you switch topics, it can result in more raw answers, which may help you build a more accurate company portrait.

Whatever the seller’s skillset may be, it is an area of the business that will need direct and swift attention by you.

What are their areas of interest and skillsets? What do they do inside the business? What does their day to day look like?

Even understanding how much vacation they take will tell you how married or essential the owner is in day-to-day operations. Some owners take two weeks every quarter, while others haven’t been on a vacation in ten years. This is also part of the “bus test”: if the owner got hit by a bus, what would happen to the business?

Competition Who are the competitors? What would the competitors say they did better than this company? What makes this company different? What is the best way to learn more about the industry?

Growth Opportunities What is the path to growth? Why do they believe this is the single best path? Have they had success doing an activity that scales or is it a new initiative? Why have they not executed it themselves? Often, the seller’s perspective of future opportunity is rooted in a problem or an obstacle that needs to be addressed—either in the company or the industry.

Challenges and Threats What is the biggest challenge facing the business? What is the biggest threat facing the business? What would need to h...

Driver for Exit Why are you selling? I never ask this question up front. It is the most anticipated question by the seller and the broker and they have an answer before the company is listed. I find that if I ask it up front, I get the same answer as the OM and the same answer as the broker told me in the screening call. If you ask it after you have built rapport, presented yourself well, listened to their story, and understand the business better, you may be able to put pieces...

If you can’t find a compelling reason for someone to walk away from a cash cow, trust me, there is a reason, and it likely hasn’t reared its ugly head yet.

Personnel Who are the key people in the company? If they were buying it, what changes would they make? Who is critical, and who is not performing?

After several decades of practice, he’s become an expert in acquiring businesses. The very first thing he does when considering a new acquisition is go out to lunch with the seller. If they don’t have a connection or establish a rapport in the first meeting, Bly doesn’t go any further with the deal. He knows how vital a company’s culture is to its success, and he knows it comes directly from the top down.

So, although you’ll likely want to negotiate owner’s involvement following closing, my position typically goes like this: get them out as soon as you can (but not a moment earlier). Following the first couple of days, it’s better to have many short interactions, rather than keep them around.

Spend some time immediately following the meeting reflecting on the business. Does it fit your target statement? Can you get excited about the business? Will you take pride in being the CEO of this company? What did you like and dislike about the company? What is the biggest threat facing the company? What is the single greatest opportunity for the business, and does it match your skillset?

I believe in taking calculated risks, but it’s essential to start outlining the benefit-to-risk ratio, and where you believe you can take this company. The best way to do this is not by looking at the company itself and deciding on a gut feeling, it’s by understanding the industry trends at large and seeing what’s happening and what is possible. Applying business strategy frameworks and various growth models to quantifiable information about the industry will help you determine and project the plan forward for this company.

Knowing what makes a company different is more important, especially in mature markets, than what makes it better.

Porter’s Five Forces provide a framework for identifying where the power lies in the supply chain, where the threats exist in an existing business model, and where the strengths of a company’s value proposition can be found.

In the same regard, acquiring a business has inherent risk. By applying the forces, you should be able to clearly identify what the risks are with a specific business and whether you are comfortable with the level of risk or not. Another key component that will help understand the state of the industry is where it is in the lifecycle.

The period of all of these lifecycle phases is dependent on the industry itself and how long-term an offering might be. A company in a growth industry, for example, might be having good times today, only to experience technological innovation that makes it obsolete in a number of months, while other industries experience decades of comfortable adulthood. The acquisition entrepreneur needs to consider all aspects of an industry to identify the opportunity.

Acquisition entrepreneurs see the opportunity at any industry stage but tend to lend themselves to more mature industry companies with solid upside opportunity if executed effectively. Knowing where the current company fits in the lifecycle is often the first step to identifying what types of opportunities exists for the company.

One thing is for sure: you will be facing a business challenge as the CEO of the company. Either in the near future or the medium future. Solving problems is the day-to-day activity of the CEO. The more you can predict what that challenge will be, before buying the company, the better.

Growth strategy typically pulls from one (or many) of four broad plays: diversification, product development, market penetration, and market development. This is the “how we plan to sell more stuff” part.

One common denominator among the sustained, best-performing public companies in history is what Collins calls the “hedgehog concept.” This concept points to an organization’s ability to continually make decisions based on an underlying, crystal-clear understanding of the intersection of three areas, and achieve superior economic returns as a result. Those areas are: (1) what you are deeply passionate about, (2) what you can be the best in the world at, and (3) what best drives your economic engine.

The problem with formal business plans is that they can be hundreds of pages, overly academic, and complicated to implement because of the sheer size of them. Personally, I consider this a wasted effort. Much of what comes out of that process is gleamed simply from outlining your thoughts and getting it in front of people who would consider investing or lending you the capital to execute. This is better executed with a short executive summary and a pitch deck.

Most small businesses lack sophisticated IT systems and marketing programs. Are these areas you intend to invest in?

You’ll find there will be three stages of financial analysis as you go through the process of acquisition: “back of the napkin” projections are fine at the initial Offering Memorandum review. As you prepare to write a Letter of Intent to purchase, you’ll want to get more specific in your mind about how this will look in the future. Finally, after a Letter of Intent is agreed upon, you’ll need to firm up your business plan and financial projections.

In Exponential Organizations, Salim Ismail says organizations that are growing exponentially (the unicorns) have adapted to the technologies that are growing exponentially. They don’t allow the business to be a bottleneck for growth, and it’s possible to go from startup to a Fortune 500 company faster than ever before.

Because an LOI is a non-binding agreement, I want you to get comfortable with taking the step of making an offer. Too many potential buyers want to spend time doing more research and use it as an excuse to not move forward. It’s certainly okay to request the information you need to make a decision about whether to make an offer, but the pre-LOI phase is not the time to do due diligence. Either you like the business enough to move forward, or you don’t. Make a decision.

An asset sale is simply that—you are a separate entity, acquiring the assets of the target company. A stock sale means you are buying the actual legal entity.

However, before deciding what you want to offer, there is another critical step you need to complete. You need to stress test your investment so you can get comfortable with the downside risk associated with your investment.

Personally, my default setting is that, although I like real estate investments, I prefer to keep them separate from business investments.

Taking what’s included in the asking price into consideration, you can understand what your offer should likely include. An asset sale with X offer price, plus inventory, plus AR, minus AP. This is the most common approach.