Tight labor market? Bad economy? This is the perfect time for an acquihire, the practice of buying a business to benefit from its workforce.
I say it’s a recession. Others say a recession is coming. But we all agree that for the past five years, it has been a challenge to hire qualified labour. It was true five years ago. It remains so today. As the economy stagnates and labor markets ease, the best employees will not be laid off. They will not be available for rental.
George, the former owner of an insurance company near Leominster, tells me he has already seen a significant drop in premiums in this tough economy. Fewer business start-ups mean fewer umbrella and key man insurance transactions.
Home sales have fallen off a cliff, so fewer people need liability and homeowners insurance. Overall, George’s business has seen trading volume drop nearly 15% year over year at George’s business. However, due to inflation and rising labor costs, expenses are increasing proportionally. Once upon a time, George would have immediately “adjusted” the company and laid off workers. But not this time. Employee retention is a new phenomenon.
Owners remember how difficult it was to manage without a full workforce. George and others who keep their employees will be better prepared when the economy picks up. It does not help other employers who need these workers. And that certainly didn’t help George’s profit margin, which sank to zero for who knows how long.
As inflation rises, interest rates also rise, driving down company valuations. It’s a good time for you to invite your favorite competitor over for a cup of coffee and offer to do for him what George wanted: someone to buy his business and keep his staff employed. This is called an acquisition.
An acquisition is a process of taking over an entire business, including employee relations. Let’s face it, our interest in buying a business drops dramatically if the workforce isn’t strong. You may have a financial interest because the purchased business generates cash flow. Or maybe you want to access their product line, technology, distribution or customer list. But often the most strategic value comes from acquiring people.
An acquisition is a subset of an acquisition; a worker-centric recovery. (In the strictest sense of the definition, an acquihire only targets employees; I will expand this definition to be more practical). Even during the best labor markets, an acquisition saves the time and capacity otherwise needed to recruit and onboard new employees.
This does not mean that you cannot also benefit from taking over a list of customers, products, trucks or machines. But in this environment, the beauty of an acquisition is that the economies of scale will allow you to do more with the combined workforce than the two companies previously did separately. That’s the sales pitch — let’s do more together. The seller can come out on a high note that they might not otherwise have been able to achieve on their own.
For example, assuming the two companies are not identical in every possible way, one of you will be better at executing workflows and processes that enable manufacturing, delivery, and customer service efficiency. more excellent. Or maybe the two sales teams collaborate to share the best bits of their storyline. Or maybe one of the companies has a marketing funnel to provide more leads to salespeople from the other company. The likelihood of you selling the exact same thing is low. Your expanded product line will allow for greater market expansion as the increased product line will attract new customers.
Every business has its strengths and weaknesses. George is an old school base blocker. His company had a great sales culture. Finding and closing the deal is in the DNA of every employee, including operational staff. However, it lacked database management, KPI tracking, and innovative solutions.
For example, George’s team was good at knowing if a new business was going to open but not when it was going to open. This is a data weakness; George’s team were excellent at reaching hope and throwing, but they weren’t the first to have the opportunity.
George’s team has enough money tongue to often win this case, as long as their products are on a level playing field. However, George discovered that he had lost some of the sales to Matt, a competing insurance company. Matt offered the same insurance as George, plus some tax avoidance techniques.
George and most of its competitors could provide professional liability insurance and workers’ compensation insurance. However, Matt would also offer defined benefit plans.
According to my book, “Don’t Run Out of Money in Retirement: How to Increase Your Income, Avoid Taxes, and Keep More of What’s Yours”: “A defined benefit plan can be either a cash balance plan or a pension plan. Participants in a defined benefit plan can contribute up to $230,000 per year in 2021. Instead of paying taxes on $2.3 million over the next decade ($230,000 × 10 years, assuming there’s no increase), you put that money in a retirement account. A joint business owner and employee can “draw off” a contribution and protect nearly $900,000 of income. Why only buy insurance when you can also avoid taxes?
But George wasn’t losing all those sales; his team was good at closing deals. Matt’s team, however, was made up of high-level nerds (heard with the most rave reviews) who spoke way over the heads of potential customers, often leaving them with more questions than answers.
Matt’s team was too smart for their own good. You can see how both would be better – nerds creating solutions and sales people closing deals. George saw that 1+1 could equal 3; he called Matt and arranged to be redeemed. Now George is letting someone else pay the bills, earning an education salary, and monetizing his life’s work.
You can check websites like BizBuySell or Loopnet to see who is actively selling. But that’s not your best bet. Companies that register on these sites are generally not knowledgeable sellers.
The good news about this is that you can negotiate good terms. The problem is that these salespeople don’t do a good job planning to sell and are often the most skilled workers themselves.
For example, a Berkshire County CPA firm is for sale on one of these sites. I offered all cash for the asking price ($585,000). The owner refused because she wants out now, but I needed her to stay for a few years while I transitioned.
Your best bet is to call your competitors directly, tell them your intent, and ask to meet. These potential sellers are more likely to want to sell and stay, providing you with top talent.
And your call could be timely. With the bad and worsening economy, your offer could spur the seller on with the extra help and cash they need to stay afloat (this can make seller failures look like a success) . An acquisition can reinvigorate both businesses by rapidly increasing their potential.