What is easier - to buy something or to build something? Usually buy. Which is cheaper? Many would say build, but if we are talking about businesses (rather than houses), it is typically cheaper to buy an existing business than to start one. What if you are already in that business and just want to grow? The same principle applies - in fact, it is typically significantly better to buy due to synergy. Synergy is probably the most-often used (and least understood) word when talking about buying another company, but it is important to understand.

The concept of synergy is simply that the sum of the parts are greater than the individual. That is, 1+1 = 3. Two companies combined are worth more together than the two separately.

 

Synergy typically arises in two broad areas:  

1. Marketing synergy - two products are sold to similar clients, or through similar distribution channels, so it makes sense to market them together. Canadian banks have bought up insurance companies in order to market insurance through their networks (although legislation prevents them from doing as much as they would like.) Or think of Microsoft - the more things it can bundle with its software, the more it can dominate the market.
2. Operational synergy - there are cost overlaps that can be reduced by joining forces, head offices, etc. We are all familiar with the story: one company buys out another, and lays off a number of "head office" staff. There are typically a lot of "synergies" in accounting, HR, finance, management.

So why not do it yourself? These types of synergies aren't just available for the big companies. The same applies to small companies. If you are running a successful widget service company, why not buy a second? We can help you find the right one!

 

Next month, we will talk about issues and pitfalls to avoid.

 

In the meantime, if you would like more information on buying a business, contact us at 204-478-7266x110.

 

Q3 2014 U.S. Survey reveals that Main Street businesses with $100,000 in revenue were the most difficult to finance and businesses with revenues of $1 million or more were the easiest.

 

A new U.S. survey shows that the lending climate over the last 12 months favored larger businesses as brokers report that it was easier to secure for financing for the sale of businesses with revenues of $1 million or greater. Small Main Street businesses with revenues of $100,000 were more challenging to finance according to the 3rd Quarter 2014 Market Pulse Survey published by the International Business Brokers Association (IBBA), M&A Source and the Pepperdine Private Capital Market Project. The quarterly report evaluates market conditions for businesses being sold in Main Street markets (values under $2 million) and lower middle markets (values $2 million to $50 million).

 

Among the business engagements that terminated without a sale in the last quarter, nearly three quarters of them (74 percent) were deals valued at less than $500,000. Deals valued at $5 million to $50 million and were the most likely to sell and only 1 percent of them were unsuccessful.   

 

The majority of respondents (51 percent) indicated that deal flow increased compared to 12 months prior and 37.5 percent of advisors report that closing ratios have increased, meaning they're selling more of the businesses they work with. Advisors maintain optimism for a positive business climate going forward.

 

"With the current market dynamics, we're seeing more boomers selling their businesses, large demand from buyers, and an increased appetite for lending," said Scott Bushkie, president of Cornerstone Business Services. "That adds up to more businesses being sold. For sellers waiting to time the market just right, I think we might be at the peak soon as 68 percent of advisors say deal multiples were the same as 12 months ago, indicating the market may have plateaued."

 

When asked about a buyers or seller markets, advisor perceptions consistently shift to a seller's market as deal size increases. Advisors reported that having unrealistic expectations was the main error made among sellers that impacted deal success in the last quarter followed by declining business sales and burnout.

 

The Q3 2014 survey was completed by 242 respondents, representing 18 regional and international business broker and M&A associations. Half of the respondents (50 percent) had at least 10 years of experience in the M&A industry. Participating advisors reported closing 252 transactions in Q3 2014.

 

For a copy of the full report, email us at kim@bealconsultants.ca.
 

Key findings include:

• Retirement was the leading factor driving business owners to market, being the main reason for 33 percent of the closed deals. "New/better opportunities" was the main reason for 18 percent of deals followed by "burnout" (17 percent).
• In the lower middle market, buyers were most likely seeing horizontal add-ons or a higher return than other (financial) investment opportunities. Main Street buyers were more likely to be "buying a job," although horizontal add-on and better ROI were also leading factors for businesses valued between $1 million and $2 million.
• Individual buyers led the market, with most of those buyers being serial entrepreneurs or people who had previously owned a business. More than half (51.6 percent) of buyers of companies with revenue between $1 million and $2 million were experienced individuals.
• When the buyer was an individual, the majority (53 percent) of buyers fell into Generation X (age 30-49) and Boomers (age 50-59) accounted for 31 percent of business buyers.
• Manufacturing stood out as a hot industry for Main Street and lower middle market M&A this quarter with nearly a third (30 percent) of businesses in the $5 million to $50 million range being manufacturing companies.
• Results for buyer location showed that larger businesses are more likely to sell to buyers out of state as 60 percent of businesses with revenue between $5 million and $50 million said the buyer was located within the country whereas 48 percent of businesses with revenue between $500,000 and $1 million said the buyer was located within the same state. However, international buyers remain interested in businesses of all sizes.

It should be noted that this survey was primarily of U.S. market participants, although trends in the U.S. typically show up in Canada eventually.

 

If you are interested about the implications on selling your business, contact us at 204-478-7266x110. 

 

************************************************************************* 

 

About International Business Brokers Association (IBBA)  

and the M&A Source

 

Founded in 1983, IBBA is the largest non-profit association specifically formed to meet the needs of people and firms engaged in various aspects of business brokerage, and mergers and acquisitions. The IBBA is a trade association of business brokers providing education, conferences, professional designations and networking opportunities. For more information about IBBA, visit the website at www.ibba.org. 

 

Founded in 1991, the M&A Source promotes professional development of merger and acquisition professionals so that they may better serve their clients' needs, and maximize public awareness of professional intermediary services available for middle market merger and acquisition transactions. For more information about the M&A Source visit www.masource.org. 

 

About Pepperdine University Graziadio School of Business  

and Management

 

A leader in cultivating entrepreneurship and digital innovation, The Graziadio School of Business and Management at Pepperdine University focuses on the real-world application of MBA-level business concepts. The Graziadio School provides student-focused, globally-oriented education through part-time, full-time, and Executive MBA programs at our 5+ Southern California campuses, Northern California campus, as well as through online and hybrid formats. In addition, The Graziadio School offers a variety of Master of Science programs, a Bachelor of Science in Management degree completion program, Presidential and Key Executives MBA and executive education certificate programs. Follow the Graziadio School at www.facebook.com/pepperdine.graziadio 

and https://twitter.com/graziadioschool.  

 

Current Businesses for Sale