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Do Good Buys Finish Last?

It’s amazing how many buyers fail to win business acquisitions because they are afraid to pay full price.  With fire sale after fire sale during the recession, perhaps buyers are now conditioned to feed off the bottom in search of a good buy. However, in many cases, this means that when competing with other buyers for a strong business, they lose, even if paying the highest price would yield them attractive returns.

Before price discussions begin, it is important to establish an acceptable range of returns.  Don’t rely on rules of thumb to determine price.  Instead, work with your advisors to model the future performance of the business under your ownership, and the likely value if and when you exit. Next, narrow your return targets based on the likelihood that the forecast will be met (or risk that it won’t), then talk to your bank about available leverage.  Finally, use these factors to arrive at a price that will meet or exceed your return requirements on cash that you invest.

Armed with these numbers, your decision to move forward or walk away will be based on strategic financial figures, not emotion.  Taking a logical approach will help avoid over complicating the deal and is a better way to create a positive rapport with the seller. And, in a market where more and more buyers are competing for good businesses to acquire, you’ll increase your chances of winning one, so you can get to work on generating those returns.