Affording a Small Business Acquisition ZWEIG LETTER TOP ARTICLES
These four components all work in concert to make buying the business more affordable and easier to fund.
By Mark Zweig, Chairman & Founder, Zweig Group
Those four components include a cash down payment for "book value” of the business, an amortizing interest-bearing note, an annual payment based on a percentage of revenue from the selling firm’s clients for two to three years post-sale, and consulting agreements for selling firm principals. These all work in concert to make buying the business more affordable and easier to fund. Here is a specific example of how to buy a $2 million firm: • Book value down payment. The book value down payment is essentially cash for cash and accounts receivable. It’s like moving money from one account to another. In the example above, a $2 million annual revenue firm would probably have a book value in the range of $300K-$500K. So you use $300K-$500K of your cash for a day or two (or draw on your own line of credit) for your down payment. But once you own the business you get $300K-$500K in short-term liquid assets to pay yourself back that money immediately. • Amortizing note. The note in this case could be another $300K-$500K, and let’s say that will be paid out over three years. For this example, it is $400K paid in three annual payments, or $153K a year at 7 percent interest. That money comes from profits this selling business will make. Hopefully a $2 million revenue firm with lower overhead (because you will be reducing professional liability, legal, marketing, accounting, etc. expenses post-acquisition) should be able to generate at least 15 percent margin post acquisition. That’s $300K a year assuming absolutely no growth. That leaves you about another $150K a year left over.
Let’s face it. There are thousands of small architecture, engineering, and allied consulting firms out there with aging owners who are ready to retire. The bigger firm buyers aren’t interested in them. They are too small and it’s not worth their time to find them, buy them, and integrate them into their businesses. But acquiring these companies and giving their owners a way to get out is a big opportunity for you to grow your own AEC firm. That is why buying another firm is included in the strategic plans for many growing AEC firms today. Yet, my experience is that most potential smaller and mid-size firm buyers think they cannot afford to buy another company. A typical $2 million revenue AEC business might be “worth” $1.5 million. The $8 million-$10 million revenue AEC firm buyer doesn’t have that kind of cash sitting in their account. So as far as their principals are concerned, buying another firm is just out of consideration until they can “save up” a bunch of cash. But it shouldn’t be. No one writes a check for the entire purchase price of a company up front. I want to show you just one example of how you could structure a deal that would allow you to buy a firm that you may not have considered before. The way to do it is to get the seller(s) to finance the deal for you. A typical deal structure that has not only worked on dozens of transactions we have helped our clients with but one I have also used myself several times involves four components. And it is critical to understand how your knowledge of these will affect your ability to make an offer and put a deal together that would benefit everyone.
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