How To Get The Smarts You Neeed To Buy A Business. How To Find & Buy A Good Business?

[Clinton]

There was a recent thread about buying businesses (that I won't link to) but it got me thinking I could help the community if I put together some advice. So here goes.

First, yes, making an acquisition is the quickest way to grow your business. Much better than all that hard slog growing organically by increasing sales. But if it you think no special knowledge is required to buy a business, and that anybody with a bit of common sense and business experience can do it themselves, leave this thread, go somewhere else! Please. Maybe try the genius thread.

For everyone else, how do you get the smart? Three ways:

1. Hire me. It'll cost you a lot of money as I ain't cheap, and being the greedy git that I am I charge by the hour. So you might want to consider the alternatives first.

OR

2. Go do a ton of research yourself. Spend a few quid buying some books. The two best selling authors of material on buying businesses are Richard C Parker and Ted Leverette. Richard and I used to collaborate on buying businesses many, many years ago. Both of them wrote me very flattering reviews in LinkedIn but it's not me, it's they who are the real experts. Richard started a private equity company and is on a different trajectory now, but Ted's still in the game. Note that neither of them cover the British context but 90% of what they cover is relevant to you. You'll get mega smart reading their stuff.

OR

3. Watch David C Barnett's videos on Youtube. Free. Really decent bloke (though being Canadian he knows nothing about UK specific regulatory, tax and other considerations). But he gives savvy and practical advice and he really knows what he's talking about. I've spoken with him several times and collaborated with him on stuff.

There are lots of courses around for wannabe buyers. Many will claim to teach you how to buy an established and profitable business without using any of your own money. Yeah, get rich without investing anything! And they'll charge you £5K to £10K. Good luck to you if you fall for that pitch. But if you really want a course, and some hand holding, you could save yourself a ton of money and buy David C Barnett's course instead - £200 or so - and you'll learn the stuff that actually does work.

What do you need to learn? The below is what you'll need for a simple deal. If you're trying to raise finance elsewhere , there'll be a lot more steps. So, for example, if you're raising part of the price by borrowing against his Accounts Receivables you'll need to get his book, his aged debtor breakdown etc. You'll need debtors' names so the finance company can credit check them. You'll need all sorts.

But let's keep it simple and assume you've got some cash to invest. The steps:

1. Deal Sourcing

Finding the right deals is far more difficult than you think. Businesses already on the market at various portals are often rubbish businesses and their owners have completely unrealistic price aspirations (often because they've had a business broker value their business).

2. Initial Assessment

Before you dig deep into a business you need to be able to assess whether it's worth the time and effort. You need an early filtering system. The skill required is being able to quickly dump businesses that are likely to be dogs. I can decide with 10 seconds of seeing a company's accounts that they're not worth investigating. Sometimes I don't even need to get that far - simply from the text of the covering email I form an opinion that the vendor is a plonker - it's usually because he has no idea what really impresses buyers. So we'll be talking at cross purposes. I'd rather let him go waste somebody else's time.

3. More Detailed Assessment

Here you collect enough material to put together an offer package (Yes, it's a package, not a price). You collect accounts, you have a list of questions you ask. What exactly you ask is going to vary widely depending on the business and the circumstances of the sale.

4. Valuation & Deal Structuring

You need to be able to work out what's a decent price for the business, how much of the price should be paid in the future, how much should be dependent on performance, what's a decent security to offer for the deferred portion of the price, what conditions you need to impose, what concessions you need to extract (on working capital to be left, what the net asset position needs to be on day of completion, who's going to be liable for corporation tax and other liabilities that have accrued up to the day of the sale, all sorts of other stuff).

5. Negotiating

Now that you know where your various red lines are, you go into the negotiation. You give some, you take some, you reach a deal that everyone is happy with. This is tricky as there's always a gap between what the vendor wants and what the buyer is willing to offer. It takes some savvy and finesse to find a compromise package or to "bridge the valuation gap" as they say in our industry. You then draw up a Heads of Terms and get it signed.

6. Due Diligence

This is where you start tearing everything apart. You need a good accountant to dissect their numbers and find where the bodies are hidden. You need a good lawyer to look over their contracts - contracts with employees, suppliers, whatever (and even their T&Cs) - and to examine a ton of other stuff so he can advise you and he can start working on the clauses he needs to insert in the Share Purchase Agreement to protect your interests and minimise your risk. And you need to know the industry well to do some operational DD yourself.

That's all there is to it and bingo, you're now the owner of a nice business.

Good luck!

 

[estwig]

Shameless spam

 

[JEREMY HAWKE]

Old @Clinton is pushing his own bill here with out paying the £36 one has noticed .
I know you have £36 mate !

It is a good post though . ! I came across a chap a few days ago He had brought a business where a portable / sectional helicopter garage was on site and used as a workshop .
When they moved in the workshop was not there it had been removed and he did not even realise that it was not included in the sale .
So I will be getting Clinton on board if I ever buy another business , but I wont be

 

[Clinton]

Actually, maybe people are not getting the joke at #1. The main message is don't hire me.

And I'll repeat it here. My main business is as in my signature and I prefer to stick to that.

But, yes, I do link to my own site because those are the best articles I know to help someone (for free) who's interested in, for example, online marketplaces for business.

 

[MikeJ]

6. Due Diligence

This is where you start tearing everything apart. You need a good accountant to dissect their numbers and find where the bodies are hidden. You need a good lawyer to look over their contracts - contracts with employees, suppliers, whatever (and even their T&Cs) - and to examine a ton of other stuff so he can advise you and he can start working on the clauses he needs to insert in the Share Purchase Agreement to protect your interests and minimise your risk. And you need to know the industry well to do some operational DD yourself.

What do you think a typical cost would be for that? I know it's a bit "how long is a piece of string" but an indication would put it into perspective for people.

Our total legal bill for selling a company with a turnover of £5m was £200k, and it was money very well spent. I'm pretty sure the buyers spent more than that.

 

[Mark T Jones]

Nonsense.

Just put a post on here along the lines of 'I'm thinking of buying a can firm for £5K. Is this a good deal? is there anything I should look out for?'

that will cover it

 

[Clinton]

What do you think a typical cost would be for that? I know it's a bit "how long is a piece of string" but an indication would put it into perspective for people.

Our total legal bill for selling a company with a turnover of £5m was £200k, and it was money very well spent. I'm pretty sure the buyers spent more than that.

Now we're getting to the right type of question!

The cost depends on the complexity of the deal. I've bought businesses at the lower end of the market, and very straightforward deals, and I had solicitors quote £1,500 for the Share Purchase Agreement (SPA).

But here are some of the services one might (or might not) require of a legal firm in a typical £2m - £5m deal:

1. Assistance with DD (I use the word assistance intentionally. Lawyers don't "do the DD"; DD is never completely "done"!)
2. Drawing up the Heads of Terms (or vetting HoT that someone else has put together)
3. Advising on areas of risk - complicated ownership structures with multiple limited companies, a holding company or two, inter company financial transactions muddying the waters, asset sale vs share sale etc.
4. Doing the SPA. The buy side normally puts the SPA together but it's often a 60 page to 100 page document and there's a ton of small print in there and there's much that can go wrong so drafts of the SPA often go back and forth for several weeks.
5. Drawing up other legal contracts. So, for example, if you're going to continue in the business as a consultant for some time into the future you want a consultancy contract. If some of the price is being paid in the future you want documentation to cover you on security (For example, sometimes the security is a debenture on the company and you need paperwork to cover that. If security is a PG by the buyer then you need paperwork to cover that as well). If it's only a part-sale or sale where you retain some shares or where you are paid in shares of the acquiring company there's the Shareholders Agreement to be sorted.

As you say, how long is a piece of string? From the deals I've encountered in my time I'd say that small and simple deals can range from £1,000 to £5,000 for a lawyer. An average cost for a £2m-£5m deal would be maybe £20K.

The £200K you encountered seems to me to be on the high side for a business with t/o of £5m (though it's not turnover that determines the cost but level of complexity). At that size you are unlikely to have had to deal with regulatory red tape like getting clearance from the CMA. But if you had an unresolved EBT issue for example, the costs could rise pretty quickly. I don't know what the complication was in your case but there must have been one for it to cost £200K.

 

[gpietersz]

I thought of buying one of those nice courses that I keep seeing advertised on Facebook. They even teach you how to buy a business without any money!

First, yes, making an acquisition is the quickest way to grow your business. Much better than all that hard slog growing organically by increasing sales.

If you pay a reasonable price

Most acquisitions by listed companies are over-priced and lose money for the shareholders. I am sure its much better where owners (very likely also the management ) are in charge and using their own money and do not have the same incentives to expand, but there must be some temptation to over-pay for what looks like a short-cut.

I am also quite surprised by how much some sellers expect to get, especially micro-businesses, even one man bands.

 

[MikeJ]

The £200K you encountered seems to me to be on the high side for a business with t/o of £5m (though it's not turnover that determines the cost but level of complexity). At that size you are unlikely to have had to deal with regulatory red tape like getting clearance from the CMA. But if you had an unresolved EBT issue for example, the costs could rise pretty quickly. I don't know what the complication was in your case but there must have been one for it to cost £200K.

Yes, we were a licencee of a US company. A Japanese company wanted to buy then, and we were wrapped up in the whole deal. Just to confuse matters, their subsidiary in Europe bought us, while the Japanese company bought the US company. The SPA finished up at around 250 pages...

 

[The Byre]

The chances of finding a good company that is also for sale are very, very small. Owners sell companies for a reason and retirement and fatigue with the job ain't never the real reasons. They sell companies because they know that the game is up and either the company is going to fail or the entire market is going to collapse.

If you do manage to find a good company, it will be good because whatever else happens, it will still be worth the sticker price. So all that guff about staged payments and profit share ain't gonna fly! These people want cash-money!

"You are buying a company with a £10m property portfolio and IP worth another £5m minimum. The whole thing is yours when £15m has landed on my account and in the meantime, I am talking to other potential buyers!" is the typical reaction to someone with a real company that is worth real money. They might add something about buying a non-returnable option for a higher price, but the reality is, they know what they have and they know what it is worth.

Of course, if you are buying an air-filled balloon (rented premises, leased vehicles and leased equipment, short-term or freelance staff, bought-in software, etc., etc.) then - well, what can I say - buyer beware! One little thing and that balloon deflates!

You are left with a burst balloon, like Eeyore on his birthday!

DD is never completely "done"!

BINGO!

This is where so many purchases end in tears. The vendor knows what you don't know. He is at the rockface. He knows that many of his key customers are facing difficulties and are asking for time to pay. He knows that the market is heading South for the Winter! He knows where the bodies are buried. He goes to all the big trade fairs and talks to his competitors and sees their pain and knows what they have planned. He knows that key employees are thinking of leaving and selling the company could easily push them over the edge. He knows all this - and he's keeping all this to himself. That is all for YOU to find out!

He may even be in cahoots with some staff "If this goes through, there's £20k in it for you! Hell, you wanted to leave anyway, so if this goes through, that could help you set up your own place!"

Here are two company purchases, one good and one bad. I was involved in the first and the second was sold by two friends of mine.

GOOD COMPANY SALE

A small Italian electric motor manufacturer was sold to a large US international for $2m who just wanted a key patent and took the buildings and land and their market share as a bonus. The owner knew that he would have to spend at least $1m to bring the place up to all the new legal H&S standards, so he just wanted the money. The US company closed the place down, sold off land and other physical assets, assigned the patent to the parent company and paid the staff a generous settlement, so all were happy. The Italian company was a turkey, but they had spent $2m on a key patent and a market share - and that's all they wanted!

BAD COMPANY SALE

UK hi-tech company with 100 staff, making advanced analogue and digital pro-audio equipment was sold to a very large US conglomerate for $XXm. Clever MBAs crawled all over everything and inspected every book and leger, every diagram and layout for several months. They knew everything about the company except one big thing - they were outsiders to the UK high-end pro-audio market. They already had bought amateur and semi-pro UK companies, but they didn't know one thing - in pro-audio in the UK, it is usual for R&D and manufacture to be kept totally legally separate. All the IP belonged to either one of the two owners or a friend of theirs and was only licensed to the company for another five years. Some IP agreements ran out even sooner and those lines had to be immediately abandoned. They missed that one fact (that every senior staff member also knew) completely. When the five years were up, all production had to stop. They spent $XXm on an historic brand name and a small production facility in a rented building.

EPILOGUE

Italian owner - happy retirement and the US guy who negotiated the deal is now company CEO. He doubled the share price in a few years and that doubled his remuneration package to $5m.

UK owners - happy retirement. The US parent company was bought out by a Japanese company and they gutted the hapless US management. Last year the trademark and company name ran-out so one of the two former owners and business partners reregistered the name and company without even having to buy it back and he plans to relaunch the brand next year. A real-life cake-and-eat-it fairy story!

 

[RobinBHM]

The chances of finding a good company that is also for sale are very, very small.

I think the majority of small businesses are worth virtually nothing.

Many dont own premises, so have no bricks and mortar assets.
Equipment probably wont be worth much.
Order book, established customers and website SEO might be worth something, but if they were valuable in the sector, competitors would have had first dibs.
If sale is due to retirement, expertise is probably going in the sellers brain.

Personally I think many people buying small busineses are buying a liability not an asset.

Wise words from Clinton.......anybody thinking of buying would be wise to browse this thread.

 

[Clinton]

The chances of finding a good company that is also for sale are very, very small.

Actually, there is a skill to finding these businesses. And there is a cost.

People not willing to spend money on a buy side broker, deal sourcer, or other solution, are destined to spend an eternity trawling through the junk at Rightbiz, Daltons etc.

And many of those plonkers looking to buy a business for £1, don't want to spend money - apart from what they paid the "guru" to tell them that they don't need to spend money - and so never, ever end up actually finding and buying a business.

When I was buying small tech/online businesses, I spent £20K on bespoke software. Imagine a whole army of spiders crawling Flippa, Daltons, Rightbiz etc every hour of every day.

I constructed a solution to get a daily filtered list of best targets from the thousands of online businesses coming up for sale and even then it took me an hour or two everyday to go through the list.

I did used to share on my forums, for free, some aggregated stats and market intelligence derived from all that crawling. (We did also discover lots of other interesting things - like massive shill bidding operations all over the place at Flippa which the management knew about but to which they were turning a blind eye!)

When most of the businesses for sale are crap businesses, or have owners with unrealistic aspirations, you need to have some advantage in the market if you're to find the good 'uns. To make matters worse, there is a lot of competition looking for businesses to buy. In addition to genuine buyers, you are competing with thousands of plonkers who have zero capital to invest but who are posing as fully funded buyers.

 

[John Hemming]

Most acquisitions by listed companies are over-priced and lose money for the shareholders.

I wonder where the research is that justifies this. Whereas I accept some acquisitions are overpriced and some particularly cause problems for the purchaser. Generally it is possible to buy for an EBITDA of around 10 or even less and many listed companies are valued at a higher EBITDA hence before any synergies it would add to the value of the listed company.

Problems arise when people are in a rush to make acquisitions and pay too much or buy dross.

 

[John Hemming]

They already had bought amateur and semi-pro UK companies, but they didn't know one thing - in pro-audio in the UK, it is usual for R&D and manufacture to be kept totally legally separate. All the IP belonged to either one of the two owners or a friend of theirs and was only licensed to the company for another five years. Some IP agreements ran out even sooner and those lines had to be immediately abandoned. They missed that one fact (that every senior staff member also knew) completely.

That really should have been covered by Warranties and/or found in the DD. I am really surprised that this could happen unless they were cutting corners by not paying for advice properly.

 

[Clinton]

Forget What You've Read, Most Mergers Create Value

Or so says the article. But the truth is mixed. There have been a lot of disasters in M&A. But there have also been many successes.

We'll never know the full story. In large M&A deals when there's a failure we tend to hear about it because value destruction is public, it's reflected in the share price. And journalists jump on it like an army of leeches because they love bad news. When the merger is a great success, nobody talks much about how it all worked out as expected.

When small deals go pear shaped we don't hear about them. The company just dies a quiet death, or restructures and operates at a fraction of its previous size.

But in all the stats and the thousands of articles I've read on this over the years my gut feel is that more small deals end up successful than the big ones.

There's another important indicator that a deal is likely to work, and this is covered in the article I linked to above.

The deal is more likely to work when the acquirer is making a large cash injection whether to buy shares or shore up working capital / reduce debt. Deals involving payments in shares, or payment in all the other BS compensation the "buy a business for £1" charlies try to get away with, are far more likely to fail.

 

[John Hemming]

The deal is more likely to work when the acquirer is making a large cash injection whether to buy shares or shore up working capital / reduce debt. Deals involving payments in shares, or payment in all the other BS compensation the "buy a business for £1" charlies try to get away with, are far more likely to fail.

That would not be surprising in that for a company to pay a chunk of cash they are going to be much more careful.

 

[gpietersz]

@Clinton that article is looking at it from a different point of view. The gains to the shareholders of the acquired companies outweights the loss to the shareholders of the acquirer.

"A second reason the prevailing narrative about merger failure has survived is that financial reporters tend to take a one-dimensional view of value, looking only at the effect of mergers on the stock value of the bidding company, and overlooking the effect on the acquired company"

 

[gpietersz]

Some studies:

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.493.2564&rep=rep1&type=pdf
https://www.sciencedirect.com/science/article/abs/pii/0167718789900507
https://www.sciencedirect.com/science/article/abs/pii/S0304405X04000327
https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261.1992.tb04674.x

The problem is that all but one require payment to read full versions. You might be able to get access through a library.

 

[The Byre]

That really should have been covered by Warranties and/or found in the DD. I am really surprised that this could happen unless they were cutting corners by not paying for advice properly.

There was a good bit more to the story than that - they already owned a German company that had a minority share in my friends' company and full DD had been done at the time. Over about a ten year period, the IP in the technology ran out and new patents and designs had to be created. This was done via their own private company that was not part of the main company or was licensed from a friend whose name was featured as the designer on many pieces of equipment sold.

All those too-clever-by-half MBAs from Harvard and Yale assumed that the IP was owned by the company because that is the usual way things were done in the US and it was the way the mass market in the UK worked for amateur and semi-pro audio equipment. But when you are building a 60-input mixing desk for a specific studio and to order and the sticker-price is a mid-six-figure sum, things look rather different.

It's not the only massive mistake they made. They lost their main wholesalers in the UK by insisting on new conditions and they closed an entire department, who then merely up-sticks and started a new company that destroyed their market share in that sector. They also wanted to rid themselves of one brand and agreed to a management buy-out at a knock-down price that then went on to become their main competition. When the Japanese took over, most middle management and all the upper management had to get their hats and coats and leave the big desks with all the pencils behind.

Needless to say, my friends were cockahoop with pleasure! Many a single malt was drunk and the words 'Due Diligence' were spoken with broad smiles and even with guffaws of laughter!

Actually, there is a skill to finding these businesses. And there is a cost.

All the good deals I have ever seen were between parties that already knew one another very well. We sold out to one of our main customers in 1999, the BAD deal I sited was sold to a minority shareholder who wanted to 'tidy-up their ownership portfolio' and the GOOD deal with the Italian company was because the US company knew about that key patent and wanted it. The company as a going concern was totally completely and utterly worthless (I should know as I drafted the documents on the value and the costs of continued production!) - but the patent was worth $2m.

The lesson I had to learn is - when you have a fish on the hook and they are starting to panic that they might 'lose' the deal, smile sweetly and shut the f**k up. Or as Napoen put it "Never interrupt your enemy when they are making a mistake!"

 

[Clinton]

All the good deals I have ever seen were between parties that already knew one another very well.

Such deals are very much the exception. I'd be surprised if they account for even 1% of the number of deals done.

There is a ton of money out there looking for investment opportunities. Stocks are overpriced, especially the S&P. Banks are not paying any interest and, in fact, are imposing negative interest, the bloody cheek!

Other asset classes, like residential property, are risky at this point given current prices relative to earnings.

So where do investors go?

According to a recent article in the FT, there's $2.5 trillion of dry powder out there. Because of where I fit in the ecosystem, I get invited to various private equity and other events in London and the one complaint I hear time and time again is about lack of enough opportunities ie. not enough good businesses to buy.

Finding a good business at a fair price is very, very, very difficult. I know investors willing to pay 3% to 5% to anyone who finds them a business for sale which deal proceeds to completion.

<added>OMG, I've just realised. To the Joe Public reader: This is not an invitation to contact me about your business and tell me how I can make 30 grand selling for £1m your little corner shop that's never made a penny in profit!

 

[John Hemming]

Some studies:

Thank you for these references.

The first one refers to a footnote which says:

For a review of studies on the success/failure of M&As see (Jensen & Ruback 1983; Agrawal et al.
1992; Mitchell & Stafford 2000; Ali-Yrkkö 2002; Tichy 2002). We should note how little transparency
exists when evaluating the success or failure of M&A transactions and that each method used has
clear disadvantages, but if we accept the failure rates in various studies measured with different
approaches as a fact, at best M&As do no harm and their outcome is arbitrary. Even setting aside the issue of different measurements of success and the many methods around, the conclusion also
depends on the perspective that is taken – whether the target’s shareholders’ gains are included in the calculation.

The others are difficult to check although one does look at a statistically valid sample of mergers in the USA between companies on different exchanges, but I am not inclined to spend any money checking these things out.

I only have anecdoctal experience of various corporate financial transactions although I do have personal experience of some (both on the selling and buying side).

It remains, however, there are quite a few listed businesses that grow through acquisition of unlisted businesses. I would be quite surprised if this were to be on average a failing process.

 

[John Hemming]

Finding a good business at a fair price is very, very, very difficult.

I think that is an entirely valid point and this may be the reason why a number of corporate finance transactions end up as pain for the purchaser in that people who are set on doing some transactions can end up with too low standards (or a willingness to pay too high a price)

 

[gpietersz]

@John Hemming that seems to reflect the same difference in point of view as the article @Clinton linked to: "the conclusion also depends on the perspective that is taken – whether the target’s shareholders’ gains are included in the calculation."

In general (almost always!) when a takeover of one listed company by another is announced the target's shared rise, while the acquirer's shares fall so its clear what the market thinks. That is prevalent enough that it does not really need a study to confirm it.

 

[gpietersz]

It remains, however, there are quite a few listed businesses that grow through acquisition of unlisted businesses.

I suspect that the acquisition of unlisted businesses by listed business will have a much higher success level in terms of the acquiring businesses shareholder value than acquisitions of listed business by other listed businesses. The latter tend to be much bigger deals.

 

[John Hemming]

In general (almost always!) when a takeover of one listed company by another is announced the target's shared rise, while the acquirer's shares fall so its clear what the market thinks.

I saw this recently in the announced merger of Redde and Northgate. I have not done the detailed calculations, but would assume that the price movements were such as to bring an arbitrage between the two prices to zero (otherwise you can get free money by selling the one (going short) and buying the other).

That would be likely in any other similar situation where there is a shares for shares offer. One would expect the shares offer of the targets to be higher in notional value than its market price more generally so this would not be surprising more generally, but does not prove anything about the market view of the deal itself.

 

[Joshua Boast]

I have previously looked into buying a business as it CAN reduce many of the risks, however, you will pay alot more and it does increase the risk in my opinion. It also depends on loads of other variables of course.

 

[gpietersz]

I saw this recently in the announced merger of Redde and Northgate. I have not done the detailed calculations, but would assume that the price movements were such as to bring an arbitrage between the two prices to zero (otherwise you can get free money by selling the one (going short) and buying the othe

That is true, but if the market thought the offer was good for the shareholders of the acquirer the prices of both would move up, with the price of the target moving up more to prevent arbitrage.

Also, if an all share offer (or any offer that was not all cash) was going to be good for the acquirer's shareholders, it could make a lower offer in the first place.

However you look at it, a share price fall means the acquirers shareholders lose. Its just how that varies.

 

[gpietersz]

I have a question for those with experience of SME sales, particularly in the light of @Clinton's comments about there being plenty of money for people with the right business to sell. What makes a business sellable? I have been thinking that looking at a business (especially when planning) from the perspective of a potential buyer would be a useful tool in distinguishing between creating a freelance job and creating a business (a way to get work, vs a capital asset).

 

[Clinton]

You should try reading my stuff some time

I've been banging on about this for years - telling people what attributes they need to build into their business to make it appeal to buyers and to maximise value at point of sale.

Try this article of mine for starters.

TL;DR:

1. Build a good management team and reduce the business's dependence on you.
2. Make profit (Profit is, duh, what's left after you pay yourself a market wage!)
3. Ensure upward sloping graphs (on profit, turnover, everything).
4. Put good systems and processes in place.
5. Read a few books on exit planning ...and do this YEARS before going to market.
6. Hire the right professionals to assist with the sale.

I only get involved with the last bit. When anyone has done the first five, and has a turnover of a few million, come talk with me and I'll find you the right professionals to assist with the sale of your business

(For the semi-literate people earlier in the thread that ^^ is the shameless pitch)

 

[gpietersz]

@Clinton I have read some of your stuff. Will read that article.

(For the semi-literate people earlier in the thread that ^^ is the shameless pitch)

More of the tact you are famous for

 

[John Hemming]

That is true, but if the market thought the offer was good for the shareholders of the acquirer the prices of both would move up, with the price of the target moving up more to prevent arbitrage.

The market cannot work things out that quickly as a rule. It is easy to work out the arbitrage between the prices, however.

There are always two separate things. One is the effect of the merger on the real business involved which can be read from the accounts, but not that quickly. The second is what impact that has on the share price - really in comparison to similar companies in the same sector.

The point I have made is responding to an arbitrage opportunity is a good reason for the prices to be aligned by the target going up and the source going down. I would not be surprised if the market makers did this when they read the RNS at 7am. I have looked at the charts for REDD and NTG and those moved quite substantially quite early in the day on Friday. I cannot see the timing of that precisely, however.

It could have been driven by an arbitrage trade or two although looking at the trades there are quite a few small trades in the first quarter of an hour.

 

[gpietersz]

The market cannot work things out that quickly as a rule. It is easy to work out the arbitrage between the prices, however.

That means the market's initial expectation of a takeover is negative, because they usually are and prices usually stay below the price before the announcement for a while.

If you think the market is prone to be initially too negative about takeovers you should be able to profit from it by buying into all post announcement dips - on average you will make a profit.

If you look at the particular case you picked, Northgate's price is still well below what it was before the announcement even though there has been time for analyst's to look at the numbers and for Northgate's management to get their message out. Assuming the announcement was the the start of the day morning meeting notes on Friday probably had initial reactions and there should be reasonable analysis by now.

 

[The Byre]

Such deals are very much the exception. I'd be surprised if they account for even 1% of the number of deals done.

I completely disagree!

Every deal I have ever come across (and I have only ever worked in medical supplies, electric motors, the music biz and the media - trade mags in particular) have been between parties that have known one another and usually intimately.

Because you have stated this before, I actually asked the guy who held my hand for the sale of my company. He used to run a section at IBM's M&A dept. and I asked him how and where he found purchase targets. He told me that they watch the market and see if there are any companies that are suitable and start to approach them (Softly, softly, catchy monkey!) The company does not go on the market, there will be no bidding war and the parties have to negotiate a package that makes sense to all concerned.

The trouble for brokers is that good companies are somebody's pet, somebody's baby. I can name two companies off the top of my head (both friends of mine) that are up for sale - but they have to know and trust the purchaser. They have a proud history, they have staff, they have pride in what they do and they want to see their baby prosper and grow and they want their baby to be in good hands. If some Joe Blow rocks up waving a cheque book, they'll be told to f**k off and that the company is NOT for sale. Not now and not ever!

On the other hand, if someone came from the same industry and showed that they have a track-record of trustworthy and honest dealing over several decades and was prepared to sign up to specific development guarantees, it would be a very different matter.

I have NEVER seen a company within the music business in the UK that was sold to someone that the owners did not know personally. I have NEVER seen a company within the medical supplies business anywhere that was sold to someone that the owners did not know personally. M&As within the media business are all pure incest! None of these deals go on the open market. Nobody tells anybody "Hey, we're for sale folks!" All these deals start with a known and trusted friendship.

The music business in both the UK and Germany is particularly incestual - everybody knows everybody else! If you don't know them, you will certainly know somebody who does know them. Wheeler-dealer record companies come and go like the snows of Winter, but those people who move and change the industry have been in the game for decades. George Martin, Jim Marshall, Micky Most - now all dead but everyone (self-included) got to know them and to like them. When Peter Gabriel bought SSL, he did so because he knew the management personally and had been using their mixing desks for several decades.

When someone screws up or plays games, everyone gets to hear about it! When (extremely famous rock star) tried to stiff someone for their bill, I asked that person if he ever had problems with any other big stars - "You've just done a giant Rolling Stones tour and I assume they pay their bills?"

"That's all down to Mick and Keef!" he told me. "They's gentleman. They pays in advance!"

About 15 years ago, I was having a quiet beer with one of the music biz's movers and shakers in a bar outside in the sunshine and next to a lake, when some berk rocked up and approached my colleague. Heaven knows how this creature found us, but there he was. "Oh you must be X. Well, I've got a big-money deal for you!"

He got no further than that. "Do I know you?" asked my friend. The creature shook his head. "I came here to get away from c*nts like you - now f**k off!"

It was a magnificent moment. The creature slunk back into the shadows from whence he came, tail between his legs and his Estuary-English mouth shut. The music biz is filled with people who have in the distant past been stung by narcissistic prats waving cheque books and making big promises. It's a hand-shake business and if we don't know you, we won't do business with you.

Bösendorfer pianos was sold to Yamaha under condition that the manufacture of pianos remains in Vienna and that the tradition of the company remain 100% intact. Yamaha has a magnificent history of building musical instruments since 1887 and has never deviated from that tradition. Brit Row PA company was sold to their rivals Clair Bros because the two companies knew one another and trusted one another to maintain both staff and tradition. Inverness Medical was sold to Johnson & Johnson because J&J had been looking at IM and knew them very well and the two guys who started IM knew that their baby would be in good hands.

According to a recent article in the FT, there's $2.5 trillion of dry powder out there. Because of where I fit in the ecosystem, I get invited to various private equity and other events in London and the one complaint I hear time and time again is about lack of enough opportunities ie. not enough good businesses to buy.

Probably more than that! Money is cheap and real equity is expensive. I'm seeing people that are new entrants to the investment markets throwing silly money at total balloons that are guaranteed to be like Eeyore's birthday present from Piglet. Very often, these are themed PE and VC funds (black, women, green, super-ethical - you get the idea!) They pile in at $X and slink away at $X divided by four!

And someone somewhere says "Wow! Christmas came early this year!"

 

[Clinton]

I do not get to see the deals where some woman who owns a hair dressing salon sells the salon to one of her stylists, or a dentist sells his practice to someone he met at a conference, or Mr Singh's son takes over Mr Singh's corner shop.

There are no doubts deals like that happening all the time and they wouldn't appear on anyone's radar - not mine, not business brokers', not market data companies'.

But I don't even know if those should count. They are all jobs, not businesses.

The examples you provide are of larger businesses being privately sold. Those, too, don't make the brokers' radar, or mine, but if they are limited companies they do figure in the ownership and credit information tracked by the data companies, and I don't see that.

But what I do realise is that I'm grossly ill-informed and out of touch on the matter of Piglet, Eyeore and their social activities. My excuse is that my kids have grown up now and I don't have any grandchildren yet. May I enquire as to how you are so familiar with what's happening in that world? Bored with watching politics?

 

[John Hemming]

If you look at the particular case you picked,

There is a big overhang of stock on Redde because LInk Solutions are selling the Woodford holdings. This will drive down the price of both Redde and Northgate. Once they have gone below 3% I will look at the issue as to whether to invest any more in the combined business. This started at 28% and dropped further during this process.

 

[The Byre]

I do not get to see the deals where some woman who owns a hair dressing salon sells the salon to one of her stylists, or a dentist sells his practice to someone he met at a conference, or Mr Singh's son takes over Mr Singh's corner shop.
There are no doubts deals like that happening all the time and they wouldn't appear on anyone's radar - not mine, not business brokers', not market data companies'.

Inverness Medical only sold the diabetes section to J&J. It went on to buy another 16 medical supply companies and went public. TO is $2.5bn and it has some 10,000 employees. It has another name nowadays - Alery or Alere or something like that.

Brit Row - TO £13m, net assets £5m. SSL - TO £25m and NA £3m.

But I don't even know if those should count. They are all jobs, not businesses.

But what I do realise is that I'm grossly ill-informed and out of touch on the matter of Piglet, Eyeore and their social activities.

It's a $6bn turnover business.

The creative industries in the UK are today significantly larger than manufacturing. Time to take it seriously!

 

[Deleted member 59730]

Trade Shows.

When the day's work is done the restaurants will be buzzing with gossip and deals. Next year a fair chunk of the companies have merged. They knew each other for years.

 

[Chris Ashdown]

Clinton , Why are you always on this forum which is normally about small insignificant companies and sole traders

You keep giving advice as though we are all buying a PLC, or multi million pound companies, your telling us every day you are not the right person for us small people; and you are the Muhammad Ali of the business transfer world, maybe you could publish your company details so we can check you out to see if there is any value to your name or if its just all glorifying your name

 

[estwig]

Personally, I marked Clinton down as some sort of Walter Mitty character, a long time ago.

Amusing at times, ultimately full of sh*t.

 

[Deleted member 59730]

Personally, I marked Clinton down as some sort of Walter Mitty character, a long time ago.

Alongside Mr. D. who should have been chucked off ages ago.