What would you do post acquisition?
June 08, 2020
by a searcher from University of Virginia-Darden - Darden School of Business in Richmond, VA, USA
I went the self funded route and bought a company for $815k putting $85k down. It was independently valued at $1.3MM without working capital and I negotiated about $300k of working capital into the deal. My note was $760k after closing costs and attorneys fees. My company had an Ebitda last year of $350k ebitda after paying $180k to the owner and his wife and was growing at 17% per year. It's cash flowed $350k to this point in the year despite COVID-19 and I acquired in the first quarter. For the life of me I don't know what to do with the cash and here are my options:
1) Pay down the debt: The SBA is covering the cost of the debt for the next few months as part of the USA's stimulus for small businesses. Borrowing at zero percent is great leverage as long as I can make a profit.
2) Invest in the public markets: I just can't bring myself to pay today's prices for the low returns that the public markets are bringing. Debt is so cheap that I think it's driving up asset prices to insane levels. It just doesn't make sense to me.
3) Acquire another company: I'd like to do this but in the best case scenario that takes a long time to find a great target and build the rapport to acquire. It also requires a lot of energy that may not pay off with a good acquisition.
4) Do nothing: this may pay off but there's also the opportunity cost of any investments or deals.
5) Some combination of the above.
How should I approach this decision? What would you do?
from Bentley University in Boston, MA, USA
A) Rainy day fund: It is good to have at least six months of operating expenses in reserve. Things can turn side-ways in a blink and it's good to have the cushion to absorb it without having to find outside funding when you actually need it.
B) Invest in the business. Figure out what improvements will position yourself for the future. New equipment, improving processes, information systems. Look for projects that will bring a new type of customer/project and can reduce the cost of production/acquisition of materials of the business.
C) Sales / Marketing investment is a tricky beast. This is an area that you could put lots of investment and still come out barely breaking. Nevertheless, underestimating the value of a diversified and robust client list one does it at one's peril. Pending the type of business, there are many ways to build on the client list from hiring an experienced salesperson, a targeted online advertising campaign, or attending trade shows. In this area, they are countless ways to spend one's money, the trick is finding the way that is wisest.
D) If you are going to invest in a different business, it's preferred if it vertically or horizontally integrates into the current business. However, there are many books written on the difficulty of integrating two businesses successfully and it's important to start building a good team that can take some of these responsibilities of integration.
Lastly, investment into the public markets, it sounds appealing but there might be unfavorable tax consequences pending how the income is flowing through the enterprise. In addition, the markets, at least to me, don't make good sense at all these days and you don't want it to be a distraction in running your business.
You have done a great job in finding an excellent opportunity and are running it well Yet, IMO it's a tad too early to lose focus and miss opportunities to further optimize the business..
from University of Virginia in New York, NY, USA