This document provides guidance on acquiring businesses through little or no cash outlay. It discusses evaluating if acquisition fits your strategy, acquiring businesses with succession, performance, or strategic issues, determining a fair price based on cash flows, negotiating a seller-financed deal structure, conducting thorough due diligence, and avoiding common traps in acquisitions. The key steps are evaluating acquisition opportunities, building a financial model, making a non-binding offer, performing due diligence, and structuring a seller-financed deal to acquire the business with little upfront cash.

2. How to Profit through
Acquisition
(With Little or No Cash Outlay)

3. Is Acquisition right for your
business?
• Is bigger better?
• Competition
• Geographic
• New lines of business
• Can you handle the new company?
• Management
• Capital
• Is this part of a well thought out
long term plan?

4. Can you profit from the
acquisition?
• Combined cost savings
• Decreased competition
• Synergies
• Bargain purchase

5. Three conditions of Business to
be acquired
• Succession issues
• Performance issues
• No issues (strategic)

6. Succession Issues
• Baby becomes generation in reaching
retirement age.
• Most businesses do not have a succession
plan other than “we’ll see how it goes”.
• This is an advantage to the buyer
• You are bringing a solution to the selling
owner

7. Performance issues
• Businesses may be looking to sell, because their
alternative is closure
• It may be a management problem
• They are your competition, but are failing
• Can you do it better?
• Do you have time?
• It may be a core business problem:
• Too much competition- Watch Out!
• Too little demand- Watch Out!
• Be prepared to pay little for such a business, but also be
prepared to feed the business more capital

8. No Issues
• Difficult to motivate the seller
• You may end up with a Partner
• Pricing may be high
• Diamond in the rough; Successful business
that doesn’t present well

9. The Price is Right
• Real Estate is Location, Location, Location
• Business acquisition is Patience, Patience,
Patience
• Time is on your side. If you are maximizing your
efforts, the sellers will be the more motivated
party
• Professional business valuations are available
but expensive
• If you understand the business, you should be
able to determine a price

10. Build Model
• Businesses trade or cash flows
• Capital intensive businesses will also include equipment
and inventory in their value
• Be prepared to start at 4-5x cash flows, plus the fair value
of capital
• This is not set in stone
• Pay attention to the yield on assets
• What if there are no cash flows?
• The business is worth the assets, or some discount
• Seller may be motivated to get out of debt
• Don’t get sucked into paying up for future growth

11. Cash Flows
• Beware of the accounting system
• If the business has not been audited (common) then the
financial are wrong
• This is not set in stone
• Pay attention to the yield on assets
• Watch out for “person items”
– In your purchasing model, build in estimates for the unexpected.
• Some capital equipment may need to be replaced
• You may need additional labor
• Make sure that the owner has deducted fair
compensation for themselves.
• Some owners confuse profit and compensation

12. Deal Structure
• Standard deal structure is either:
– Purchase of Stock
• You assume unlimited liability
• Seller gets capital gain treatment
• I don’t recommend it, but it should certainly affect the price if you go this
route.
– Sale of Assets
• You get a fresh start with the business
• Seller’s tax status is a little gray
• It is their responsibility to anticipate the outcome of the sale of their business.
• Additional price is worth the avoidance of liabilities
• It would be good to understand the seller’s needs and
motivations as early as possible in the process

13. Payment Structure
• This is where the little or no cash concept comes in
• The days of being able to borrow money from banks to
make business purchases are behind us
• A cash offer should not be expected, but the seller may
have a specific need
• Don’t ever pay all of the purchase price in cash.
• Limit to 10-20% of the price.
• Get a price concession appropriate to any level of cash that you fund up front
• Seller financing can solve two issues:
• Financing the deal (obviously)
• Taking the place of a performance or non-competition agreement.
• The seller should expect to finance the transaction.

14. Communication
• Make your offer (non-binding Letter of Intent)
• Consider explaining material assumptions you have made
• Do not provide seller with your model
• Make sure that the seller understands that you are structuring this deal to
make a profit
• Make sure that you have the right to perform due
diligence
• It is standard to get to kick the tires
• Set the expectation that this process may result in an adjustment to the
purchase price.
• Provide a timeline for completion
• If you are very far apart on the pricing, then move on to
the next opportunity.

15. Avoiding Traps
• Don’t get caught up in a deal or attached to the company
• Get appropriate transition help from the seller, but don’t
leave seller with authority
• Watch out for non-owner sabotage
• Watch out for owner dependent businesses
• Be aggressive. The seller will be.
• Use professional help (attorneys, CPAs)
• Communicate fully with your own management team.
• Insist upon early communication with the management
team to be acquired.