Strategic Acquisition: A Smarter Way to Grow a Small or Medium Size Company by Eugene Merfeld & Gary Schine & David Annis

Author:Eugene Merfeld & Gary Schine & David Annis [Merfeld, Eugene]
Language: eng
Format: mobi
Published: 2012-02-23T05:00:00+00:00

VALUE OF SPECIFIC INTANGIBLE ASSETS

This is an often-overlooked approach to valuation. Yet in some cases, especially companies acquiring other companies, it is the only appropriate approach that will result in a sale. The approach is based upon the buyer's buying a wanted intangible asset versus creating it. Often, buying can be a cost efficient and time saving alternative.

For example, we recently sold a temporary employment agency. This agency specialized in matching people with certain computer skills with organizations that temporarily needed those skills. Because there was a shortage of these workers in the area in which the selling company did business, placing workers was not difficult. However, finding qualified workers was very difficult.

We approached firms in the same or related businesses. Through our research, we calculated that recruiting a qualified worker for this industry costs an agency at least $500. Therefore, we asked a price of $450.00 for each worker in the pool of available employees. To the buyer, this acquisition strategy not only saved $50.00 per worker, but it also cut down on the time it took to recruit. The overhead of the selling company was not an issue because the buying company already had the system in place that the overhead expense was paying for (offices, computer system, phones, etc.). In fact, whether the seller was making or losing money was of little consequence to the buyer. The value to the buyer was the value of buying qualified workers versus recruiting qualified workers through the more traditional methods of advertising, interviewing, etc.

A common application of this method in a strategic acquisition is buying a customer base that recurs on a regular and predictable basis. Customers with a high likelihood of being retained barring an extraordinary change (customers that are almost easier to keep than to lose) are valuable in most industries. Examples of industries where companies are bought and sold primarily based upon the value of the recurring customer base with regular and predictable need for service include insurance agencies, payroll services, internet service providers, and internet hosting companies.

If you plan to buy a business primarily for its customer base, insist on a credit for each customer that is not retained for a stated period of time. For example, you may want to offer $200 per customer but with a pro-rated credit for each customer that is lost during the twelve months following the closing of the sale. Pro-rating is based upon when the customer leaves-- if a customer leaves after 6 months, for example, half of the $200 would be returned to you.

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