Wednesday, May 27, 2009

Buying Smaller companies and add their products to yours…

In the past I have found a few smaller companies that I thought had interesting products and I thought they would work well with one of my product lines. Many times these companies had only 3 to 10 products and I though instead of purchasing one or two of their product I thought it would be best to buy them out completely and just reveamp all the product to fit with my company’s look and design. The formula that I found works the best is the following:
  1. Determine the average monthly income created by the company over the previous 12 month. You can have the company you are attempting to purchase to give you this information then verify this by a second source. If the company is hosted at RPGNow, for example, you can confirm the info the small company told you by asking them.
  2. Then I would offer them a payment equal to nine months worth of the average monthly income as a lump sum. So if a company made an average monthly income of $500 a month, I would offer them $4,500 for the company. Many are asking why only nine months and not a year? Because realistically sales over time decrease as more of the customer base purchases the products, which also mean less sales. This is a fair and realistic view of what you will generate over the 1st year having these products for sale under your new banner.
  3. You break the payment of the business over an allotted amount of time that is no more than 6 months to pay it off completely. If you have the money readily available, then pay if off when you make the deal. Breaking the payments into smaller ones make it easier for you to come up with the money (especially if you are having a cashflow issue) plus it gives the seller that their business is still making them money (even though you now own it).
This is simple, effective and fair way about doing it. The biggest problem that I kept running into was that many people unrealistically valued their companies for more than it was worth. One small RPG company I was interested in buying off me his company for $500. But after doing the due diligence on the company (checking with RPGNow) I found it was only worth $52 dollars. He told me his company was of worth well more than that and I was attempting to cheat him. He did not want to deal with the reality of his company so I walked away from the deal. Years later, his company went out of business. Too bad really. If he had let me buy him out, I would have been open to help make him into a popular writer in the RPG industry using his new products as a “springboard” for him. Kind of what Brett Boyd did with Tricky Owlbear did with the Behind the Spell series. Welcome to the world of business. Talk to you later…