Should I Consider an Acquisition Before Selling My Business?

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By John Herubin,
Managing Director

Often, a business owner’s decision to invest or acquire assets prior to a sale focuses on “hard assets” such as capital equipment/machinery, production facilities and real estate. This purchase decision is often a return on investment analysis determining whether to repair and maintain existing hard assets or purchase/lease new ones. This decision is akin to a homeowner deciding whether to paint or remodel their kitchen to boost sale price before listing their home on the market.

For example, a recent client operated a profitable and growing metal plating service business. He could have continued at his current pace but realized he was operating at 95% capacity with his existing equipment severely limiting future growth. Many buyers in today’s market are seeking growth in their investment post-purchase. With this information, the client decided to invest in a mix of new and used equipment to expand capacity sufficiently to support foreseeable growth. Subsequent discussions with buyers revealed that desire for the added capacity which significantly factored into the successful sale.

However, since it may take a significant period of time to buy new equipment and expand growth organically, we occasionally advise owners to consider acquiring another business that already possesses the needed machinery and equipment capacity. Instead of just painting the kitchen, why not add on a deck? The acquisition often accelerates growth that may have occurred organically. In addition to enhanced capacity, an add-on may also provide a number of ancillary tangible and intangible assets that are beneficial and desired by buyers. 

These additional assets may include the following:

  • New products
  • New customers
  • Geographic expansion (domestically or internationally)
  • Intellectual property (i.e. patents, trademarks, copyrights, brand names, proprietary software, unique processes)  
  • Key management level employees (operations, sales, engineering, etc.)

Many variables impact whether an acquisition is appropriate. The following two examples illustrate some of these factors:

Scenario 1 - EdgePoint represented a manufacturing client that believed growing through acquisition in advance of a sale would greatly enhance his business value. Several companies were identified as qualified targets. Once we assessed the value and cost-benefit analysis of the assets to be acquired, our client realized that he did not possess key management personnel that could be transferred to help operate/integrate with the target companies. After further discussions we also realized that the owner did not have the requisite temperament to operate multiple locations. He needed to physically see his operations on a daily basis, and the potential targets were each located several hours from his existing facility. So while the acquired asset would provide growth and corresponding value, it was not the best path for him. EdgePoint subsequently identified a private equity buyer that partnered with our client through a partial sale and recapitalization that provided the assets and resources necessary for our client to grow his single location business and realize enhanced value.

Scenario 2 – We also represented a client that designed and manufactured precision metal fittings. Contemplating a sale within a few years they but felt diversifying their product capabilities and markets would yield future value. A target on the West Coast was identified and acquired. The new products acquired were ultimately specified as standard equipment for a kit that converted conventional diesel powered trucks to natural gas powered. The anticipated growth of the new product capabilities and customers, in conjunction with their original business, resulted in an attractive value upon sale.

Additional considerations that should in essence be assessed by a business owner as asset purchases include the following:

  • Hiring management personnel or key employees (i.e. COO, Sales Manager)
  • Installing a new ERP system
  • Opening a new dealer location

While adding capacity through traditional routes such as the purchase/lease of additional equipment can yield strong results, many business owners have found pre-sale acquisitions as sources of additional value when pursuing a transaction. The growth that many buyers are seeking post-transaction can often be purchased pre-transaction, without the lag of bringing new equipment online and pursuing growth organically. The approach business owners take in the preparation of their business for exit has a strong impact on the ultimate success of a transaction. EdgePoint recommends business owners discuss this preparation, including acquisition of assets, with their trusted advisors when preparing their business for sale.

© Copyrighted by EdgePoint. John Herubin can be reached at 216-342-5865 or via email at jherubin@edgepoint.com.

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