When you get to the core of why people fail during their transactions, you’ll see that it is because of the lack of preparation. And Domenic Rinaldi has some data to back this up. In this episode, he shares the highlights of the 300 buyer assessments collected in 2020, offering insights into why people fail to prepare and how you can avoid it. As we get into the thick of 2021, it is time to overcome the number one thing standing in the way of having a successful transaction. Follow Domenic in this short yet insightful discussion to learn the actionable steps.
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Preparation: How To Avoid The Number One Pitfall In Transactions – Ep. 093
When we decided to launch the show, it was to address the number one pitfall that we see in transactions, and that’s a lack of preparation. We talk about this issue a lot, and if you’ve been reading for a while, you know that it’s the reason we started the show because over many years and have done thousands of consults with buyers and sellers, we consistently see that people don’t properly prepare. We can tell you that, but now we can also share some evidence of that. Over the last couple of years, we have been collecting buyer assessments, tabulating, and taking that information in the aggregate. In 2020, we collected over 300 buyer assessments.
I’m going to give you some highlights of those assessments, some high levels, and show you the evidence of why we believe that preparation is the number one issue. The number one thing that’s standing in the way of people having a successful transaction versus one that potentially erodes their entire investment. We’ll give you some actionable steps to avoid these pitfalls, but if you want to avoid the common pitfalls, please visit our website K2Adviser.com. On that site are the resources that I’m referencing and the assessment. Being prepared is critical to ensuring that you maximize returns and minimize risks. Thanks for being here. I hope you enjoy this episode.
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As I referenced in my opening remarks, we’ve been collecting assessments from business buyers for almost two years. In 2020, we collected over 300 of these assessments. This assessment was designed to capture data on where buyers are as it relates to the major pitfalls in any acquisition strategy. The assessment itself takes less than ten minutes to complete and covers everything from strategy to financing, to how people will source their deals once they’re ready.
Don’t make the mistake of adding advisors on your team that don’t have significant M&A experience under their belt. Click To TweetThe scoring scale on this assessment is 0 to 100. With 100 being the best score, it’s telling us that you’re completely ready to explore buying a business and you should have tremendous confidence moving into the market. Anything above 80% indicates you’ve done most of the important items. There’s a little room for improvement, but you’re well on your way. Anything under 80%, you should seek some assistance as your entire investment potentially could be in jeopardy. When we look at the aggregate scoring from these assessments, the average score of buyer readiness was only 34.5%. This was mostly from people who were active in the market, seeking a transaction now. The score is incredibly low. My advice is that many of these buyers should either be seeking assistance with their business searches from a professional or stop the process and spend some time addressing the gaps in the preparation.
This becomes important given that you could be risking your entire investment and the livelihoods of a lot of the people in the acquired company. When you consider that most deals require a bank loan, when you’re this unprepared, there will be significant pitfalls putting your tire investment at risk. While the aggregate results are alarming, with a little bit of knowledge, the major pitfalls can easily be avoided. Let’s review some of the specific areas that the assessment measures.
The first area is how many respondents had a strategic acquisition plan. Only 39% of the respondents had properly thought through all the aspects of an acquisition plan, which typically includes everything from the type or types of businesses, size, geography, the attributes of a target business. What’s the desired EBITDA before and after debt service? Do you want a management team? Are you okay with union, or do you prefer non-union? Are you open to buying real estate, or you want to lease? If you’re a first-time buyer, what type of talent do you need in the business to complement your strengths and weaknesses? Will you be an active or passive owner? What are your goals for the business after the acquisition? If you’re a current business owner looking to grow through acquisition, what is the main purpose of the acquisition? Are you looking to grab some competitors, potentially buy some technology, pick up talent or acquire clients?
Transaction Preparation: Many buyers should either be seeking assistance with their business searches from a professional or stop the process and spend some time addressing the gaps in the preparation.
Having a solid plan upfront will give you the direction necessary once you launch into a search. You can more easily network for opportunities if you are crystal clear about your plan. It will also enable you to waste less time on deals that don’t fit your criteria. In a comprehensive search, you will need to look at a lot of deals to find the ones that truly fit your objectives. The next area was related to whether or not the buyer had assembled a seasoned M&A team. About 43% of the respondents had identified who would be on their team during the process. This score is especially concerning given that 71% of the respondents had never bought a business before. When we discussed an M&A team, it’s typically comprised of an M&A attorney, an M&A accountant, an M&A adviser, a potential banking partner or partners, and specific resources depending on your experience and training.
For example, it’s maybe necessary to identify an accounting firm that can conduct a quality of earnings report, or an equipment appraisal firm that will evaluate the physical assets in a deal. If you’re looking at companies with a union workforce, you may need somebody who specializes in union and pension contracts. The importance of having a team identified upfront is it allows you to act swiftly when you find the right opportunity. This is particularly important now, given how many buyers are in the marketplace, looking for quality deals, and don’t make the mistake of adding advisers on your team that don’t have significant M&A experience under their belt. That experience should be recent as COVID has had a whole new set of challenges in the diligence and legal phases of a deal.
The next major area was related to the sourcing of lenders for an acquisition loan. Fifty-three percent of the respondents had spoken with a lender so they could understand both their debt and equity capabilities. Sourcing lenders in advance will enable you to put together some financial models so you can truly understand how much of your equity is required for different types of deals. What various loan packages will look like, potential principal and interest payments, and what would be left over for you as the owner to take in the form of a salary, distributions, or to invest back into the business? Doing some of this modeling upfront will also help you act quickly and confidently once you find a great perspective acquisition target. You can also take time to better understand the lender’s underwriting process and timeframes, and get comfortable with the team that would be supporting your efforts.
The next major area is related to integration. Integration is how you would handle taking over a new business, whether you are an individual investor or a company growing through acquisition. Thirty-seven percent of respondents said they had the knowledge and resources identified to manage an integration. This is concerning because most M&A deals fail to meet their ROI targets because the integration and transition were botched or poorly planned. This ranges from how you’ll handle employees, clients and vendors, how systems, processes and procedures will be merged, and how communications will be handled both internally and externally. This is not an area you want to get wrong. Understanding what’s necessary to have a smooth integration and transition is time well spent. The time to be planning for these issues is during your diligence phase. You do not want to wait until the deal is wrapped up and you’re ready to close to start thinking about integration tasks. It’s way too late at that point.
The next area relates to sourcing deals. Only 45% of the respondents had identified exactly how they would source perspective target companies. Sourcing has become a significant issue. I mentioned earlier how many buyers in the marketplace, and it’s not uncommon to see multiple offers on good quality deals. Sourcing deals has become a bit of an art as well as a science in this marketplace. There are business for sale websites where you can go and source opportunities, but I promise you that you’re going to be in a large pool with lots of other buyers. You need to be more creative. You need to be thinking about networking, maybe perhaps direct outreach, or hiring a firm like ours where we can conduct a comprehensive search for you based on your criteria.
If your timeframe to get a deal done is in less than twelve months, you need to be sourcing many deals at the same time. Click To TweetSourcing lots of deals are going to be important. I see a lot of buyers approach the market, and they approach one target acquisition at a time. If your timeframe to get a deal done in less than twelve months, you need to be sourcing many deals at the same time. Sometimes as many as 6 to 12 deals because some of them are going to fall through, some of them you’re not going to want to proceed with any further, and you’re going to be left with a handful that may be fit your acquisition criteria and seem like good opportunities. Having an abundance of opportunities that you can look at is critical.
The above are just a handful of the business acquisition areas that we cover in our assessment. If you are considering owning your own business and going after a business acquisition within the next few years, I strongly urge you to take our free assessment. We will email you all the results so you can see the gaps that may exist in your strategy. Plugging those gaps will be crucial to securing your investment and giving you the confidence to move forward with a search.
If you need some specific help, please feel free to reach out to us directly at [email protected]ser.com. We love to help entrepreneurs be better prepared for their acquisitions. I hope you enjoy this episode. If you enjoy our show, please remember to subscribe and review the show. I look forward to seeing you again on the next episode. Until then, please remember, scaling, acquiring or selling a business takes time, preparation and the proper knowledge.
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About Domenic Rinaldi
As owner and managing partner of Sun Acquisitions, Domenic helps clients buy and sell businesses across a variety of industries. Since 2005 he’s been personally involved in over 300 transactions for businesses with enterprise values of $2 million to $50 million.Love the show? Subscribe, rate, review, and share!
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