Keep your head up, and don’t be afraid to think big just because you’re small, there are real people selling there businesses for real reasons, the opportunity may be just right for you!

When you hear the word acquisition, you may like many think; big deals for big companies, and  alot of the time I guess it is, but we’ve just today completed our first purchasing web design business Good Use, to extend our web design business Decisive Flow, and it feels like a really great move. I’ve put a few points that guided the decision and may help you consider acquisition an option for growing your small business.

1. Have a reason to Acquire
2. Get into Acquisition thinking
3. Understand what you’re buying
4. Valuation & Funding
5. Make Everybody Happy
6. Make it Complimentary
7. Acquire with a Partner
8. Finding Acquisitions

1. Have a reason to acquire

Simply to grow is enough, this is the primary reason for acquiring, but for us we have some other pretty compelling reasons to acquire. We’re not far away from launching a new business we’ve been quietly pulling together over the last couple of months, a web based business planning tool PlanHQ. As a result both Natalie and my time is largely committed to this, so we needed a strategy for keeping the web design business, Decisive Flow, moving ahead still at full pace. Now at this point you might be wondering why with less time available for Decisive Flow we decided to grow it by buying another web design company? (Well, we may actually just be mad, but heres the rationale).

razón de adquirir (some 1am spanish)

Nat and me both really want to see Decisive Flow continue strong while we’re pushing PlanHQ, Its our little baby and it’s a good business so we want to see it keep growing. Also our time has fast been compressing with PlanHQ moving along at lightening pace, so it was time to dream up some smart way of growing the business with less of our ongoing time.

2. Getting into Acquisition thinking 

As I pondered options, at the same time I concluded a deal with one of our new business partners and angel investor in PlanHQ, consequently I felt mentally free of capital constraints and back into where I’m at my best, big thinking/moving mode. What we needed was to build a bigger business that can afford to support more good people, the only way to build the business in the time we’ve had/got, is to merge or acquire, the seed was planted.

Opportunities & experiences passed

On a capital raising trip in the US several years ago, I remember meeting a company in Florida who’s parent company was facing litigation, so the subsidiary was up for sale. At the time we had very little cash, and were looking or capital ourselves, it seemed crazy to think we’d be looking at an acquisition, but from a different angle we suddenly had a US market position immediately, which stengthened our investment/capital raisng proposition, so it became very achieveable. Unfortunately at the time the Board of the business I was representing didn’t see the world the same way so we had to stop talks. 12 month later the comapny had outstanding results, the parent comapny (NASDAQ listed) bounced back and the stock price had shifted from 22c at time of the possible acquisition to just over $2. Moral of the story, don’t be constrained by your percieved smaller position.

3. Understand what you’re buying: Domain Expertise

I’d never say there aren’t opportunities to buy buisnesses outside of your domain, there really can be remarkable deals everywhere, and at the right price, you may even just be a short term staging point while you find more buyers, broker a better deal, and make the gain in the resell. I’m no expert in this, I’m not an investment banker nor habitual investor, I focus on creating things and making money in the process, so I’ll talk about acquisitions where they help you grow or get into business you understand. In many cases, when it comes to an acquisition, there will be domain experts on the buy side, businesses already invested in the space who will know how to best leverage a business for sale, so they’re likely to provide the seller with a better valuation, plus they’ll have confidence to run it successfully. You’re best to be in this boat, buy something you know.

4. Make Everybody Happy 

A good acquisition is all about making everyone happy; 1.) the buyer, 2.) the seller and importantly 3.) the sellers/your new customers. In our case the Good Use Principal, James Westlake, is going to be travelling for some time and wants  to know the relationships he’s built up will be looked after in the same way as they have been if not better, and that he’s got a fair price for the business. We want to take on new customers who are already atuned to our approach, which is similar to that of Good Use, so we can serve customers well, you can never really buy customers, as they’ll make there own choice, you can only earn and retain customers, and the best way to do that is to be the right fit for each other.

5. Valuation & Funding

This naturally is a very important part of the above, making everybody happy, everyone needs to feel good about the valuation. Theres no hard and fast rules on valuation, it depends hugely on the specific circumstances, ideally as I’ve said, you want to be acquiring in your domain of expertise, so you’ll have a good idea of how much revenue you can get from the business and what control you have over lowering costs/increasing profitability. In our case, we’re small and pushing multiple ventures so spread thin on capital, and therefore can’t afford to carry much of a cash risk.

Return on investment & Staying cashflow positive

We’re financing the acquisition through debt/bank loan, so it’s crucial that the investment is cashflow positive from day 1, so that the debt can be serviced and paid off in a reasonable timeframe (In this case two years). So we did the valuation based on 1.) the base cashflow of the business (in this case monthly web hosting revenue), and 2.) Discounted sales forecast (very conservative additional sales to existing customers, as they all still require work to close.)

6. Make it Complimentary and Strategic

We know what our core competencies are: we’re experts in usability, web marketing, and business growth, so everything we do is centred around this. Our move into PlanHQ draws on these capabilities and is complimentary to Decisive Flow. We know that while our focus is on PlanHQ, we’ll be able to provide higher quality input into Decisive Flow, in a shorter time, so long as we have good people in it and partnerships around it. (And yes we’re putting people in it right now, so if you work with us don’t expect any slow down! : ) Strategically, it also enables us to build up talent inside Decisive Flow, and then potentially bring them accross to PlanHQ to assist, and vice versa.

7. Acquire with a partner

This may not always suit your circumstances, but an acquisition is an opportunity to build a commercial partnership with a company you want to work with closely, an existing or potential partner. The thing I’ve learnt abaout business partnershps over the years is, you’ve got to make money together in order to have the time and space to build the relationship and a joint strategy. We jointly acquired Good Use with brilliant opensource content management and web development company Silver Stripe, and this is a great way of widening the breadth of capabilities of our businesses, spreading the risk of the investment and growing each others businesses together.

8. Finding Acquisition Opportunities

My main advice on this answer to this relates to  another post I’ve done on growing a business you love, specifically the section on Talk to EVERYONE about your ideas!

There may be places where you can look to find an acquisition opportunity, businesses for sale… but more often than not, these opportunities are not promoted openly, they are instead circulated through networks, so you’ve got to build them and work them, good networks will yield!

How we found the Good Use Opportunity

I came accross the opportunity to buy Good Use in a conversation with someone I’d just met at lunch on a friday before heading away for a weekend at a family beach house in the lovely Ohope Beach where nat and me lived for a year or so. He was interested in my businesses and particularly experiences as an entrpreneur, so like everyone I ran him through what we’re up to, how I got here, what I’m seeing out there and what he could do to get himself out there. He then mentioned he’d looked at possibly buying a web design company, but had little idea how to assess it, I asked which one it was, and it was Good Use, a company very like ourselves, perfect! so after returning from Ohope surfed out with a tan and a smile, I contacted Good Use and we met immediately.

9. The Transition

Now we’re completing the transition phase, and starting to deal with the new enhanced workload, having left a rather large flow of work in the wake, I’ll leave it to Nat to say whether she’s happy about that’s going : ), but we’ll have someone coming on board very shortly. Any more is probably too much for this post, If there’s enough interest I’ll write more on Acquisitions and keep the story rolling.