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Approach to Buying a Business

In order for the value of a company to increase, earnings must grow. Earnings growth can occur organically through internal growth or externally through mergers and acquisitions. Acquisitions can be a very successful way of increasing shareholder value, especially when executed with a value investment approach. McKinsey & Company published a study of 1,000 mainly industrial US companies over a roughly two-decade period ending in 1999. Of particular note was that this epoch included the US recession of 1990 to 1991.

The study divided the acquiring companies into market leaders which remained market leaders (in the top quartile of their industries), and market challengers which became market leaders by moving into the top quartile. Success for these companies came in part because both classes of companies continued to make investments in acquisitions through thick and thin. The then-current market leaders made smaller, tactical acquisitions for market consolidation; successful challengers made larger, strategic acquisitions for market position. Investors rewarded both classes of companies. By the end of the 1990 to 1991 recession, market leaders increased their market-to-book premium by 38 percent when compared to peers. Market challengers increased their premium by 25 percent.

Successful acquisitions are based on thoughtful strategies and careful execution. Smart acquirers will first figure out how acquisitions will serve their longer-term strategies on a risk-adjusted basis. These companies develop plans that key off the stage of growth of their markets - emerging, developing or mature - and look at acquisitions as a rapid path to achieve their strategic goals. For example, in the services industry, we see fast food restaurants, with growth stifled by a mature market expanding at only 4 percent, strategically targeting specialty casual eateries occupying a niche growing at 21 percent. In 1998 #1 McDonald's ingested the 180-store Chipolte Mexican Grill, and in April 2002 it partnered with an Italian specialty chain, Fazoli's. In May 2002 #3 Wendy's purchased the 169-store Baja Fresh Mexican Grill. Both companies saw these acquisitions as a way to meet their strategic goals of growing revenue, following the market, providing good economic returns to stakeholders, and enhancing their brand images with such trendy attributes as freshness and quality.

Secondly, successful companies remove risk by making transactions almost routine. In the high technology segment, where rapid change is a way of life, top companies - those averaging more than 39 percent annual growth in total return to shareholders since 1989 - undertake almost twice as many acquisitions as do their competitors. In these companies, a few capable executives, usually the CFO and CEO, drive acquisition activities. These companies also know that the devil is in the details of assessing target companies, deal structuring, and especially integrating the acquired operations to get acquisition synergies. Effort is focused on retaining key people, ensuring that R&D and product shipments do not fall behind, and preventing sales cultures from clashing. So the devilish details are managed by experienced professionals, and the process normally transpires largely free of unpleasant surprises.

The process from a buyer's point of view is as follows:

  • The buyer has an introductory meeting with BTI Group.
  • BTI Group works with the buyer to determine the type of business that is a right fit.
  • The buyer signs Confidentiality Agreement(s) and is qualified based on experience and access to financial resources prior to introduction to businesses and sellers.
  • The Confidential Business Review is provided for the buyer's examination.
  • BTI Group arranges an initial discreet introduction between the buyer and the client company via direct correspondence, email or telephone.
  • Facility tours and initial meetings between buyers and sellers are arranged.
  • Seller and acquirer exchange relevant information.
  • A Letter of Intent is prepared, presented, negotiated and executed.
  • Acquirer performs due diligence.
  • The definitive Purchase and Sale Agreement is negotiated with assistance of BTI Group and the legal counsel of the seller and buyer.
  • Closing documents are prepared and executed.
  • Transaction is closed.

Approach to Selling a Business


 
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