Thank You for Your Interest in Navocate

Thank you for participating in our recent webcast, or for downloading a white paper, or for watching one of our videos. We strive to provide valuable information to business buyers and owners. And we appreciate your interest in letting us share our M&A experience. This guide is designed to provide an overview of topics to think about for an individual or a company interested in buying a business. As with our other guides, we hope this overview helps improve your success. While it provides a basic structure and methodology for acquiring a business, it does not address all details that buying a business requires.1 Buying a business can be risky business. If you need assistance along the way, give us a call.

Business Acquisition Planning Guide

about it entirely the wrong way. As you read this, youre probably thinking to yourself: Im a really smart guy (or gal) so, of course, I would only take the planned approach. Were here to tell you that youre probably wrong. This is how most people (but not companies) go about buying a business: I have $XXX for a down payment. What do you have available? Thats overly-simplistic, of course; but not altogether off the mark. The point is that most people go about buying a business well, randomly. 1. They contact multiple brokers with high-level acquisition criteria, thinking: The more brokers I talk to, the faster Ill find something. 2. Followed by: Now Ill just wait for something to happen, because all the brokers are searching on my behalf. So if theres anything out there, they will find it. Im working smart because Im leveraging the power of numbers. There are two basic problems with the random approach. The first is that you havent taken the time to carefully define your primary objectives. The second is that, talking to every broker and intermediary marginalizes the effect of any one of thembecause everyone has been equalized with the same information. In a business model based on a success fee, when your probability of success is equal to that of your competitors, motivation is reduced somewhere close to zero. So, while all brokers and intermediaries will be positive and reaffirmingIm sure we can help you, Bob,the probability of them actually finding a business that meets your objectives and needs is rather slimunless you get incredibly lucky.
Copyright 2012 Navocate. All rights reserved.

At Navocate we believe that a random approach produces random results. This is why we advocate a planned approach utilizing a Five Step Process to buying a business. We summarize these steps below, and will delve into more detail a bit later: 1. Define Your Goals. 2. Create a Search Plan. 3. Search Execution and Management. 4. Seek Closure. 5. Transfer. Each one of these five steps represents a complex series of multi-disciplinary actions. If you have not completed an acquisition previously, seek qualified help. Even if you have purchased a business before, we suggest that you at least seek help with those areas you had difficulty with in the past.

How Much Time is Required?

Like most things in life that are complicated, it depends. Our experience from starting discussions to closing the transactionranges from two months (dont expect that) to a year or more. Obviously, those examples are taken from very different sizes of businesses. Most schedules correlate to the size and complexity of the deal. Your schedule will be unique. Advance planning makes a huge difference. The earlier you start to prepare, and the more organized your approach, the faster, more efficient, and more successful your acquisition is likely to be. Expect to spend a significant amount of time and effort doing it.

Why Mergers and Acquisitions Fail

Before we review the Five Step Plan, lets recap some common mistakes. A. Criteria That Arent Really Criteria Having too-broad search criteria generate many target opportunities to explore. However, without focused criteria to guide your evaluation and decisionmaking process, youll probably discover that each business has its own faults that you just cant live with. A year goes by, and you are no closer to making a deal than you were at the start. Lazy thinking in the beginning results in spending time looking at deals you shouldnt have considered in the first place. Ill know it when I see it is not a plan. B. Terminator Negotiator Taking a hard negotiation stance on everythingparticularly pricemay show them whos boss; but wont result in a fair deal. If the deal isnt fair
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Two Approaches to Business Acquisitions

There are two basic approaches to buying a business: 1. Random. 2. Planned. Over 95% of prospective buyers go
1 Navocate makes no warrantyexpress or impliedregarding the accuracy or use of information contained in this guide. Seek professional legal, accounting, and financial advice whenever appropriate.

and equitable for both parties, you wont close. Thinking that all business assets should be priced as distressed assetswhether they are or not wont get you very far. A business owner with good gross margin and healthy EBITDA will stop negotiations if you just keep offering an unrealistic offer price. C. Not Understanding the Secret to Due Diligence Most buyers approach due diligence the wrong way. Consequently, most due diligence is done poorly, followed by surprises (or lawsuits) after closing. (More about due diligence later.) D. Failure to Plan for Probable Risks Never assume that everything will go according to plan. Failure to develop a risk mitigation plan will leave you unprepared, exposed, and possibly bankrupt. E. No Post-Close Transition Plan Most buyers breathe a sigh of relief after the documents are signed at closing. Finally, The End! The reality is that the closing is just the beginning. If you havent defined your 100 day transition plan prior to closing, and the business starts to fall behind as your new employees wait for you to figure out what to do, youre in trouble.

Develop your criteria in four steps: A. Assess Your Purchase Price Limits Analyze your ability to leverage your capital, structure the terms, and obtain third party financing. Think carefully about all three of these areas to define what is within your reach. How much money is available for cash injection? How much do you need to retain for working capital? (Dont forget working capital!) Purchase price is always relative to deal structure. Is the seller taking a note? Can you structure an earn out? Do you need a bridge loan while seeking more favorable long-term financing? Run multiple sensitivity analyses with different upper purchase price limits and terms so that you understand your financial abilities and limits. B. Assemble an Advisory Board Make it formal or informal as you wish. But make sure that you involve at least one person you can trust to give you an experienced business opinion and to level with you when you are off track. Start with people you already know and trustpreferably people who already know you more than casually. Youll also want professionals like your attorney and accountant on the team. This team will serve as your sounding board and will help you through the entire process. C. Assess Your Strengths and Weaknesses Everyone has managerial or leadership qualities that are readily transferable to different businesses. However, if you are looking to transition from your previous indus-

try and market experiences to a new industry, you need to assess your strengths and weaknesses honestly and accurately. If you do this correctly it will help you eliminate markets and segments where you lack experience and ability. This process will help define the kind of people you need to have around you to complement both your skills and weaknesses. For example, technology geeks often need a good operation and finance person, or just a good communicator with people skills. A great vision leader needs a detailed oriented Number Two. Involving your advisory board in assessing your strengths and weaknesses will help define which of your strengths can transfer, and which of your weaknesses should not. D. Develop Acquisition Criteria and Anticipate Risk Now that you have an idea of your buying power, and what businesses will cater to your strengths, it will be easier to define your purchase criteria. First define the macro criteria that you can publish, such as geography, revenue range, EBITDA targets, business category (manufacturing, distribution, technology, service, etc.), business stage (product development, growth, steady-state, cash cow, or turnaround). Review the Buyers Section of Navocates website for real life examples. With that macro definition in place, next start developing your personal criteria. This can remain broad or be very specific. Along with the above definitions comes a better understanding of the risks associated with each alternative. How important will it be to keep the current staff? Will customers remain loyal to the business? How will competitors react? There will always be risks. Understanding and anticipating the likely risks will help avoid those businesses with excessive riskor businesses with risks that are not acceptable to you.
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Navocates Five Step Acquisition Plan

Lets review how you can avoid all of those problems, and more, with Navocates project management methodology applied to this Five Step Process.

1. Define Your Goals

Starting a search with a hope of finding a business you will fall in love with might result in a successful acquisition. However, we venture to say, that plan will be far less successful than a structured search. It is difficult not to love a business that is in your area of interest, caters to your strengths, and produces a healthy cash flow. Defining your goals, however, requires more effort than dreaming about owning a golf shop.
Copyright 2012 Navocate. All rights reserved.

2. Create Search Plan

A formal search plan will help you understand what you are searching for and how to measure it when you find it. Youll be fishing in a potentially enormous ocean, so you will want to target only those companies that meet specific goals and objectives. A. Do it Alone or Engage Professionals? While your personal network and the Internet offer ample opportunities to explore targets, your network may not be broad enough, and the web isnt very targeted. Ask yourself the following questions: Do I have the time to search on my own? Can I generate the right targets? Can I collect enough reliable information about these companies to make an informed decision? If so, then go for it. If you were an M&A professional with an investment bank or private equity firmor if you had corporate M&A experienceyou may very well be able to successfully create and execute your own search plan. If you are thrilled about the hunt, you may just want to do it yourself. If that is the case, make sure your advisory board, or at least one mentor, watches you closely. Why? Many Hunters only want to keep hunting, without settling down (i.e. closing the deal and managing the business). If youre uncertain about doing it alone, you probably need to involve an intermediary. There are many web posts on how to select a good intermediary. Whoever you like, do some research on them to verify their integrity, experience, and abilities. Be sure to meet them and assess how well you can work with them. Personal fit and communication style are important. Also evaluate how they vet you as one indicator of their professionalism. (While youre at it, give Navocate a call too.) B. Response Tracking Think through how you will track responses with a system that can help you follow multiple leads across multiple stages of activity.
Copyright 2012 Navocate. All rights reserved.

C. Evaluation System Decide how you will measure progress across multiple leads with an evaluation system to filter high, medium, and low probability targets. D. Transition from Inquiry to Negotiations Decide how and when to transition high-probability leads from initial inquiry to initial discussions to negotiations.

continue with a planned approach. Otherwise, youre just catalog shopping. C. Evaluating and Selecting High Priority Targets As acquisition targets start to emerge, you need to evaluate, eliminate, and select the high-priority targets. The goal is to start discussions with targets that meet your criteria, and manage them down the prospecting funnel to focused negotiations with only a few alternatives that represent the best match. Evaluate best fit relative to the risk level. You will never find the perfect business. But sufficient fit is out there. Share your analysis with your intermediary and advisory board so that you dont get caught up in the excitement of perpetual evaluation and the Columbo Effect. D. The Goal: A Term Sheet The ultimate goal for the Search Management phase is to negotiate a Term Sheet. If the business at hand fits well, and your advisory board gives you a green light, you need to assess if a deal can realistically be done. Up until now your focus has been on Is this a good thing for me? Now, you need to shift your thinking to: Can we create an equitable transaction for both parties?2 E. Negotiation Isnt Just About Low Price As you get into negotiations seek terms that maximize your capital return while minimizing risks. Dont simply try to negotiate down the purchase price. Understanding whats in it for the seller will help in structuring a deal that can be successful. Wearing the sellers shoes is difficult while youre thinking about protecting your own interests. (Thus the value of an intermediary.) Instead of negotiations being about the seller maximizing price and buyer minimizing price, negotiations should move
2 Note that this doesnt say: create a great deal for me.
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3. Search Execution and Management

Now that you have a Search Plan, its time to execute. Execution requires a targeted marketing and communications campaign. Access to databases The ability to send a large number of simultaneous emails. Social media accounts, such as LinkedIn. Perhaps even direct marketing. Advanced planning, the right tools, and systematic execution are all important at this stage. A. Mass Broker Contact Isnt an Acquisition Plan When you think about how to efficiently generate leads (emphasis on efficiently) emailing every business broker you know seldom works. A broker might spend 10 minutes reviewing his existing listings relative to your request. If there is a match, he will obviously let you know. If the intermediary isnt able to get you interested quickly, however, he will likely add you to his data base and move on. With this approach, if you dont get lucky quickly, your chances of finding a viable business that meets your goals and objectives are probably slim. B. Targeted Search Preferred A targeted search often represents the best approach. Yes, you can start by searching businesses listed on relevant databasesbut you need to

to collaboration where both sides maximize the joint outcome. Consider how the graph below illustrates stereotypical price negotiationsand note the area defined as Reasonable Price Range.

Distribution of the Purchase Price Curve

# of Deals Done Sellers Deal Breaker Price Reasonable Price range

Buyers Deal Breaker Price

Buyer motivation

Seller motivation

Min. Price $

Average Price

Max. Price $

If you opt for a collaborative approach as a buyer, you may find that you can lower the amount of capital investment by leveraging the sellers willingness to take a note or an earn-out. If so, you may be willing to get closer to the sellers asking price with a smaller cash injection. In todays over-the-counter investment environment, its difficult for a seller to find safe, high yielding investment options available. Consequently, if the seller strongly believes in the business, he may prefer a note at a market-rate interest. In this scenario, you have also assured yourself of continued seller interest in a successful transfer of the business. This is a better transaction for everyone.

deceit and subterfuge. Adopt your due diligence list to your specific situation. You do not have to do it all yourself. Use as many experts as needed: Your CPA for financial statement accuracy, and for tax liability estimates. Your attorney for problems with employment agreements, vendor contracts, and other obvious (and not so obvious) legal risks. If there is a unique know-how outside of your expertise, contact a third party expert to assess both the know-how uniqueness and the competitive landscape. Remember as you go through the due diligence process: you probably signed a non-disclosure. Dont breach it. We have seen many inexperienced buyers who start calling vendors, distributors, and suppliers without the owners permission. That will place you in breach of your NDA. Now youll have to explain to the seller why his best distributor has called to ask if its true that hes selling the business not to mention dealing with a huge legal problem. C. Summarize Findings in Writing Often times, due diligence reveals problems. Some problems can be easily resolved. Others not. For example, consider a supplier agreement that automatically expires with change of ownershipor isnt transferable without the vendors approval. Again, you are more likely to benefit from collaborating with the seller if you are both working toward a mutuallyagreeable outcome. To the extent possibleand only with the owners (written) permissionresearch sales staff, customers, and vendors. Thorough due diligence is the best preparation for your next stepwriting a business plan. D. The Business Plan Many entrepreneurs prefer the big picture. Consequently, immediately after closing they want to get to the real action. Planning. Schplanning. No time for that!
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4. Seek Closure
Our definition of Closure involves financing, due diligence, project management, and (of course) the final closing. A. Start with Financing Start the closure phase by focusing on financing. The Term Sheet should outline how the deal will be structured financially. If third-party financing is required, work on that next. Consider as many sources as you can. Not just banks, but perhaps private equity as well. Banks are still very risk-adverseto the point where a great deal of years-gone-by looks like a bad deal today. Also be aware that banks cycle through industries that they consider to be in and out of favor. A bad business for Bank A may be just the ticket for Bank B, depending on which bank has gotten burned, where, and most recently. The counterpoint is that the shortage of small business bank loans has created new capital sources. Receivables and inventory financing are several examples. Shopping the loan is always beneficial. Investigate and apply to more than one source. With a good business plan in place (see bullet below) you will be better equipped to present a convincing case for the loan. B. Due diligence Do not go into due diligence trying to prove the accuracy of the sellers claims and your assumptions. Prove it wrong, instead! At one end of the scale, verify the white lies and misstatements. At the other end of the scale, verify the

You are about to invest a significant amount of your money in a situation from which there is no fast exit. Unless the business you are buying employs only you and has only one customer, there are other people involved. Where are you going? How do you communicate your plan to employees? When forced to narrate your thoughts you achieve both clarity and detail. Youre able to better assess how everything interacts, instead of verifying isolated components. If you have an investor, or if you need to borrow from a bank, you will not be able to do it without a plan.3 E. Importance of Project Management Perhaps now you realize the many varied moving parts involved in getting to a closing. This is why Navocate uses project management techniques. Managing the conditions to closing requires many parties to shuffle papers back and forth relative to the master check list. Remember that, for many of these paper-shufflers, your deal is not a priority. Its one of tenor perhaps 100. As the closing day gets pushed off unnecessarily, the probability of problems increases, and the probability of a successful closing decreases. Therefore, scheduling a regular Closing Conditions meeting, or conference call, helps to identify problems and verify that everyones deliverables are on track.

the tactics used by Kenyan Olympic marathon runners: Start full speed and then increase the speed. Time to increase speed. A. Create 100 Day Plan Before Closing Your new company can grind to a halt in less than a week. Your employees, customers, and suppliers may go into limbo, waiting to hear from you if you will be keeping them around. What do you want them to do? What is working with you like? (OMG! Everything is changing!) Uncertainty is your worst enemy. The solution: a 100 day plan. If you simply come in and say: This is how I want it done, without any context, you will create resistance. Everyone knows you are new to the business. Is she competent? Is he vulnerable? Immediate action is the best cure for uncertainty. Your 100 day action plan explains to everyone in the company what is required of the entire organization, and what is required of each employee. You also explain the transfer risks. And with that, request ideas of how to improve the plan. When the company is in motion, seek feedback, listen, and modify as appropriate. B. First 100 Days Represents Best Opportunity for Quick Change The first 100 days represents the best opportunity for you to make the biggest changes that will influence the business strategy. Resistance level is likely at its lowest point due to the change in ownership. You need to be ready for this (with your business plan) and be assertive, supportive, and communicative in driving these changes through the organization. After the first 100 days, people are used to the new normal. If the first 100 days produced resultsbetter cash flow and higher profitsyou are

in good shape. C. 100 Day Focus Focus your organization on customer retention, key employee retention, sustaining or increasing cash flow, and your new macro initiatives. Everything else can wait. As you gain momentum, people will gain respect for you and learn how to work with youparticularly if you demonstrate that you are open for suggestions and that you can be influenced. Start implementing other initiatives in your business plan. Incorporate what you learn, and move forward.

Summary and Conclusion

Buying a business, successfully, requires more time, energy, and expertise than is readily apparent. Navocates business acquisition clients realize that there is a high penalty for being penny wise and pound foolish. Rushing into a business acquisition with high ambitions, and perhaps some false confidence, can cost you significant time and moneynot to mention adversely affecting your family and personal life. Navocate provides business sales and acquisitions services for Entrepreneurial Emerging Companies with revenues from $3M - $30M. We focus on the under-served market segment above main street business brokers and below investment banks. Our team has grown businesses, bought and sold companies individually, raised capital, taken companies public on NASDAQ, and acted as intermediaries for many transactions. We serve as an experienced member of your advisory team throughout what can be a long and difficult process. Let us know how we can assist.
Paul Winkle (888) 900-5866, ext. 5 paul@navocate.com
www.navocate.com 4105 S. Bartlett St., Tampa, FL 33611
FL RE Corp. CQ1032983 Copyright 2012 Navocate. All rights reserved.

5. Transfer Plan
Now that closing has taken place, take a vacation in the Caribbean to off-load the tensions you endured! Not really. Your situation is more like
3 Navocates strategic partner Funding Roadmap (see our strategic partner web page) provides a cloud based automated software application for developing a business plan interactivelyincluding all financials. Call us for contact information and a discount.