Finding, buying another company requires planning

When looking to grow your small business, it's natural to think of ways to stimulate organic growth - expanding sales within existing markets, launching new products, or expanding services.

Consider, too, the opportunities for growth through the acquisition of other companies. Acquisitions may be selected for their potential to expand a company's current market share or as a way to diversify operations by adding a company in an unrelated sector.

Finding and selecting companies to acquire can be a challenging process.

In a former life, I was involved in the merger/acquisition process, acting on behalf of my employer to identify potential businesses to acquire. I soon learned there are a number of ways to connect with companies that may be for sale.

Business owners (or those wishing to own a business) are sometimes presented with the opportunity to buy an existing company. That opportunity may develop as a result of a referral from a banker, attorney, accountant, business broker, advertisement in a news publication or a casual conversation.

It could also come from a proactive approach for identifying businesses that may be for sale … even if they are not actively being marketed.

How to find companies

I initiated the search for potential acquisitions by making contact with attorneys, accountants, bankers, economic development persons, and a network of other possible liaisons that might lead me to a company.

And I also developed my own process for locating businesses that might consider selling. The process enabled me to target acquisition efforts on companies that were a good fit with our growth strategy.

With the help of our management team, I created a master acquisition plan.

We first completed a SWOT (strengths, weaknesses, opportunities, and threats) analysis of our company. Based upon that data, we created a list of industries/markets that we would like to expand into. Armed with this information, the search was started for companies.

The Dun & Bradstreet database was my resource. With access to this information I could develop a narrowly defined query. My search focused on privately held companies having fewer than 100 employees, with annual sales revenue of $10 million or less, doing business in the markets we selected as identified by NAICS codes (North American Industrial Classification System), and companies that had been in business more than 15 years but less than 25.

The results of my search - hundreds of businesses - were then reviewed and eliminated if there was evidence of a son or daughter involved in the operation. My rationale was that this indicated to me they had already developed a succession plan and would probably not be interested in selling.

Letter of introduction

For the remaining businesses, we determined that we would draft a letter to introduce me as the representative of a financially solid company looking to diversify our organization through acquisition of businesses that would add synergy to our operations.

We then contacted each of the companies by telephone to verify that the person on the Dun & Bradstreet report was still the owner. Letters were then printed and sent out in envelopes stamped "CONFIDENTIAL."

The letter explained that our company was looking to acquire businesses and if the owner was interested in having that discussion, they should call me using our toll free number.

My response rate was just over 8 percent and I soon began scheduling appointments to learn more about these potential business acquisitions.

We selected a few strong candidates to begin our due diligence process. As we gathered more information about the business operations, suppliers, customers, and employees; we also began to draft business plans supported by more market research which listed the major competitors, their market share, technology applications within the market, market trends (was the market expanding, stagnant, or in decline), and were there any underserved or unserved market niches?

Developed business plan

Development of a business plan for each of the proposed purchases was a critical piece for our parent company. We needed to fully understand the scope of the opportunity.

Our business plan also included an exit strategy. We determined that we would expect a specific level of growth form the acquired company. If that growth did not materialize, we had a plan for selling off the business with a list of potential buyers already developed. If the business did meet our growth expectations, then our exit strategy was to continue to expand the business and evaluate opportunities for sale of the company after five years.

Our acquisition process proved to be highly successful. Because we applied a methodical approach, decisions were well-reasoned and exit plans were in place. By researching potential companies carefully and planning thoroughly before making an offer, you can discover some gems out there for sale.

Buying an existing business provides sustainability to the acquired business and continued service to their customers. At the same time, your company benefits from the security of adding a business with a market, customers, employees and suppliers already in place. The win-win nature of growth by acquisitions makes it an attractive way to expand your business and take it to the next level.