I mentioned in a recent blog that I found my first deal at a networking meeting—another telecom company (similar to the one I already owned) with a highly-motivated seller. It can be a great place to find opportunities, and I rather stumbled my way onto that one. I’ve learned a lot about doing deals since then, and today I’d like to share a little bit on networking outside of meetings, always being tuned-in for deals, and always positioning yourself as an investor. It’s a pretty successful combination.
Networking
Networking can be hugely powerful. There are plenty of organized networking events specifically designed to do business. Try going to one of these and saying you are an investor. You will get everyone’s business cards immediately. You just have to weed out the real estate deals and start-ups to get to the real businesses.
But networking doesn’t have to be the structured kind of networking meetings or events. Every meeting, dinner date, or coffee break could be a new opportunity. Your next deal is probably a number saved in your phone! Think about it: you have hundreds of people listed in your phone, and none of them know you are an investor in small- to medium-sized businesses/enterprises (SMEs). Why not make a list of thirty and call them all for a chat?
Start by asking if you can help them. I call this the karmic deficit: you help them, and they will feel compelled to help you. So, is there an introduction you can make, or is some other way to support them? Then say what you are looking for and see if they can help. This exercise is also hugely useful for you to be comfortable with what you say and how you deal with common questions. After the thirtieth call, you will sound like a pro and are ready to be dropped straight into a live-fire scenario!
You also need to learn how to look for the signs. Our brains have powerful filters that ignore everything “non-core.” You need to tune into deal opportunities. It sounds simple, but most people don’t listen. They are just waiting to say what they want to say next. If you really listen, you will find deals everywhere in everyday conversations. Andrew, who did the first Harbour Club course back in 2009, went on vacation right afterward and ended up buying a lighting manufacturing business from a lady he met at a dinner party. A week before, it would have just been an interesting conversation with a person who moaned a bit about their business, but because Andrew was tuned in, he found a deal.
There are deals everywhere if you listen differently. At the Harbour Club, you will learn this important skill of applying a filter to how you listen. Your next deal is likely to be in your cell phone.
Identifying Yourself as an Investor
The one thing everybody is looking for is money. And if you have the thing that everybody is looking for, you’ll have more conversations than anybody else. As I mentioned above, by positioning yourself as an investor when you go to networking meetings or even to a dinner party, you’ll find that conversations open up to you that perhaps you didn’t see previously. It’s a bit like tuning in to a “Deal-FM” radio station. As soon as you position yourself as an investor, people will want to talk to you about how they can get that money from you, and it starts many interesting conversations.
A good thing about these conversations is that the people you’re talking to tend to be straight with you. Of course, everybody is going to put a positive spin on things. Still, they’re not going to tell you they have a $10 million revenue company if they have a $2 million revenue company because they know, as an investor, you’re going to look under the hood at some point. You’ll actually start some slightly more honest conversations about things this way.
I typically recommend on focusing on two areas.
Focus 1: Tactical, Distressed, or Bolt-on Acquisitions
These acquisitions tend to be smaller companies that you’re targeting because they’re distressed, or you’re using them as a bolt-on to grow your existing business by increasing either the products and services that you offer or perhaps to get some key talent or clients that exist in that business. This is a tactical move: you’re adding something that you don’t currently have.
These businesses seem to have a sweet spot, between about $500,000 and $5 million in top-line revenue. Below $500,000 in top-line revenue, you will find they are likely to be either owner-centric or one-customer-centric. That means responsibilities haven’t been assigned in the usual way, so you’ve got key person risk. (Obviously, if they’re customer-focused, you’ve got key client risk—but when they get to about $40,000 a month, these are the sorts of issues that tend to be resolved.)
There are always exceptions to the rule, but generally speaking, above the $5 million top-line revenue level, a business has started to delineate responsibilities. Marketing and finance have been given to two different people, which is great. (If you’ve ever seen accounts done by a marketing person, you’ll understand!) Management has gotten away from that one-customer thing by productizing their business. They’ve got an offering and a pricing structure that’s scalable. That $500,000–$5 million range is a good guide for a tactical, bolt-on, distressed type of deal.
Focus 2: Strategic Acquisitions
Strategic acquisitions are great when you want to enter a new market or new territory—for example, you want an office in Indonesia or a different geographical part of your own country, or you’re looking for an order-of-magnitude acquisition. I typically focus on companies that are profitable and have a history of generating profit, not the one-hit-wonder that has just become profitable.
Instead of $500,000 to $5 million of revenue, it’s $500,000 to $5 million of profit that these companies are generating. They’re typically debt-free. I don’t like a bank or financial institution to have some kind of lien or charge over the business because you’ll often find that they have a lot of control. If you have a bad year, it can suddenly be your last year. It’s always good to add a nice debt-free business to the group.
In these situations, the management usually stays. These are businesses where you want to be a shareholder or a business owner, not a business runner. And it’s important that you behave as a shareholder. I often describe it like, you wouldn’t buy shares in IBM and then arrive the next day to see if they needed help with anything. You wait for your regular reports, and you complain vehemently if they’re not what you were expecting. You need to get into that kind of shareholder mentality with those bigger, more profitable businesses. Otherwise, you’re creating a mammoth job for yourself.
Now that we’ve briefly discussed the two areas of acquisitions you should be looking for, I’d like to share two more areas that will help strengthen your acquisition strategy: finding business owners who are motivated to solve a problem and learning to focus on structure over price. Be sure to come back for it in my next blog.
In the meantime, would you share with me (and others reading) one thing that perhaps didn’t go so well at a networking meeting you attended and anything you did differently as a result of it.
Let’s Connect!
