A huge number of small businesses will change hands over the next several years. Could an acquisition allow your company to grow?

After a few slow years, a growing number of Kansas City businesses are being bought and sold.

“In 2009 and 2010, it was hard to get financing, but today we continue to see lower interest rates and banks are willing to help people acquire businesses,” said Dave Raden, a partner with Leawood’s Capitus Group, a consultancy that helps companies plan for business transitions. “If you have a good company, you’re going to have an opportunity to sell for a decent valuation right now.”

It’s currently a seller’s market, Raden said, and it can be tough to find good companies for sale at a reasonable price. But it won’t always be that way. The supply of businesses for sale could very well change in the not-too-distant future.

More than 10,000 people who are considered part of the Baby Boomer generation will turn 65 today. And tomorrow, and the day after that. It’s believed that people 55 and older own more than 30 percent of all U.S. companies that have employees.

That’s a big reason why the Pepperdine School of Business predicts that two-thirds of business owners are planning some sort of transition in the next 10 years.

And that could create a prime opportunity for small business owners who aren’t retiring. Buying another business can provide access to new markets, economies of scale and competitors’ talent and technology.

“If you think you need to grow by acquisition, it’s a great way to grow,” Raden said. “It may even be better in the future when it may become more of a buyer’s market.”

But, he noted, business owners need to be clear about their reasons for putting together an acquisition strategy.

“What’s the real value proposition for you buying the company?” Raden said. “Revenue and profit should be expected to increase, but when you look at combining the two, what are you really buying?”

Ben Olsen is a partner and the director of business operations at the DVS Group, a Leawood firm that works almost exclusively with buyers of small to mid-market businesses. There was a time, he said, that most of the buyers
he assisted
were people who wanted to leave the corporate world and operate their own business.

Now he’s seeing more people who repeatedly make acquisitions as part of a larger strategy.

“There are more investors who want to make more than one acquisition related to a core business,” Olsen said. “They make one purchase and then keep their eyes peeled for further ones down the road.

“There are two important things to this strategy. The first is the sooner you get in and get the lay of the land, you can see what the market and competition are doing. And once you build a track record, you attract the attention of other investors or angels who are looking to invest for scale.

“But no matter what, action now will be rewarded later.”

Follow a Deliberate Process

The successful acquisition of a company should involve a formalized, calculated plan. Raden recommends a four-step process.

Step One // The first is to understand the potential value enhancement that a specific acquisition can provide. Buyers should be very realistic in what the endgame will be and set up success parameters.

For example, some acquisitions offer the opportunity to eliminate inefficiencies and
reduce costs. Olsen remembers one deal involving companies that were in the business of maintaining medical equipment.

“It’s something that’s very fragmented where most operations are five to 15 technicians covering a large geographical area,” Olsen said. “Our client, HMS Health in St. Louis, saw that consolidation could make things more efficient. They’ve made two acquisitions, and they have the potential for more.”

Step Two // The second step involves extensive due diligence once an acquisition candidate is located and before an offer is made. This step should look at the target company’s financials and its people.

For example, how do the acquired company’s employees feel about the potential sale? Are there veteran employees who might leave immediately, taking key information only they have?

“The numbers are just a tool. You may put together the most beautiful financial model and miss some very important things,” Raden said. “I know one person who bought a company. Before the sale went through, he didn’t talk to their salespeople. The sales manager didn’t have a noncompete and left the next day. The company suddenly lost most of its clients and had to start working hard immediately to win them all back.”

Step Three // Next, it is important to understand all the ramifications that such an acquisition will involve in order to develop an offer that will allow you to meet your goals. This means not just how much you will pay to acquire the business, but also how you will integrate the new business post-acquisition. Be realistic about all costs that you may ultimately incur.

The DVS Group’s Olsen said there is ongoing uncertainty with government regulations, such as Affordable Care Act rules covering businesses with fewer than 50 employees. That uncertainty can make an acquisition harder.

“A lack of clarity affects the long-term vision of people buying companies. When we don’t know the real numbers, we have to be more conservative in our modeling, and that makes negotiations more difficult,” Olsen said. “There’s just a general sense of unease for what could come next from governmental bodies and how business-friendly it will be.”

You need to assemble the right acquisition team for pre-close due diligence and make sure that if at any time the deal doesn’t make sense that you are not afraid to walk away.

Step Four // The final step is to formalize the post-close integrati on process and make sure there is good communication and buy-in from all stakeholders.

The acquisition process can be eye-opening for sellers, who don’t always have a good sense of how much their company is truly worth. Nearly 80 percent of business owners who go through some sort of transition fail to reach the value goal they have for their company.

“Most people have no clue what the value of their business is. During the process, they quickly learn they have unreasonable expectations and it can take years to get over the shock,” said Joe Lieberman, a partner with Capitus Group.

“Some people continue to think they can increase the value of their company, but there’s going to be work to do. The most important thing you can do is find a business adviser you can trust with your life to help you through that process.”

What’s Next?

What is now a seller’s market for small businesses is likely to flip to a buyer’s market in the next three to five years, Raden said.

“When that happens and what that will actually mean for the valuation of companies that come up for sale, no one knows,” he said. “Even when the market does change, good companies with strong performance, with bright futures, will still be attractive to buyers, but there will be more competition.”

Olsen echoed that.

“If what you’re really in business for is acquiring quality companies, the market is generally steady,” Olsen said. “I don’t see valuations getting depressed because there is a glut of quality inventory and buyers get to create competition. Buyers are going to continue to be active, and that will help to sustain valuations.”

But change is coming, and business owners need to be prepared.

“Kansas City is vibrant. I believe there are hundreds of companies that are ready to sell and buy all over the place. This economy is so keyed and ready to go,” Lieberman said. “We all feel very strongly that Kansas City in particular, but across the country, that the next 10 years is the time. There will be a lot of transition.”