Two common business acquisition themes. The vast majority of business buyers I meet say, “I don’t want to overpay for the business.” But what does this really mean? A local private equity guy told me years ago, “If we pay 4X earnings and it doesn’t grow like we want it’s a bad deal. If we pay 7X and it grows like we want it to it’s a great deal.”
Let’s look at one buyer I know (two partners). They paid 6.5X earnings for a company making about $900,000 (after owner comp). Pretty high on the surface. But one year later the business had grown by over 50%. Now it doesn’t look like such a bad deal. How did they do it? By paying attention to things they noticed about the business.
- There was a lot of low hanging fruit, meaning customers the seller thought were too much hassle to go after (they weren’t a hassle).
- Improving the culture by treating people with respect and listening to them.
- Connected to the previous point, they put in a bonus plan for all employees. And the employees responded.
Sellers can have similar (opposite) feelings, as in, did I get enough for my business? As I’ve said for years, when both sides are a little bit, and equally, unhappy, the deal gets done.
“A happy arrangement: Many people prefer cats to other people, and many cats prefer people to other cats.” Mason Cooley
“If you’re not in the obit, eat breakfast.” Carl Reiner