When Rocco Di Lillo negotiates a deal, he wants to know as much as he can about the person on the other side of the table.

“There is an old saying that I like to use,” says Di Lillo. “You can’t get a good deal from a bad guy. I always look for shared values and then I try to understand the needs and the fears of the seller. Why are they selling? One of the things I’ve experienced is that there are a lot of reasons why a sale occurs and there are lots of different variables in how a company is sold.”

Di Lillo is a serial entrepreneur who has operated 10 companies in his career — five he founded and five he acquired. He has made nearly 30 acquisitions throughout his career and currently serves as chairman of City Visitor Inc., Porchlight Rental & Destination Services, Advanced Hydro Solutions and PCX Corp., which is the largest manufacturer of off-site electrical and mechanical gear for the construction industry.

“I’m a value buyer,” Di Lillo says. “My best play is finding a business that has a sustainable customer base and some elements of a quality team where I can improve their operations and improve profitability and sales.”

One of the keys to Di Lillo’s success is his ability to always see the bigger picture and dig into the details to help him make a better deal.

We spoke with Di Lillo about his approach to dealmaking, the process he follows to learn about the business he’s looking to acquire and why being overly cautious can make it a lot easier to sleep at night.

Take the first steps

Look for predictable cash flow.If you’re buying a business, predictable cash flow and everything associated with that is the most important thing. Alternatively, you may be buying the equipment, the technology, the people or the customers. These are valued based on your needs to improve or enhance your business. The most important thing is does it add up to predictable cash flow?

Find opportunities to bring value to the deal.You can enhance the business, its profitability and its growth because of some additional aspect that you understand how to do. That’s the ideal situation. Everybody buys differently depending on what their needs are. I look at finding a C or D company and making it an A company in a short time. That way, I’m getting more for my dollar and I’m adding to the value of the company.

There is so much money chasing so few deals that the multiples are being pushed up.You have to ask yourself: “How do I get a return on investment for this much money unless I believe I can improve the results of the business?” If it’s a well-run business you’re looking at, you’re taking a risk that it could go south. You paid X and in the long term, ideally, it’s one plus one equals three. Not one plus one equals one. There are investors who want to buy a perfectly run business and there are scenarios where that makes sense. Private equity groups may look at it as a platform business. That’s not where I play.

Dig into the details

Don’t get emotionally attached to a transaction.It’s too easy after the initial hurdles are passed and you’ve invested time and money in this deal to start to get emotionally attached to it. In addition, when you’ve successfully completed acquisitions and run businesses, it’s also easy to become too confident. When your confidence is too high, it blinds you to the reality of what’s really going on. Make sure you identify and list the key aspects of a transaction and then review those with your core advisers to get honest feedback. If there truly is a problem that is a deal breaker, you need to have the discipline to walk away gracefully and with clarity.

Study how the sales team goes to market.When I peel back the onion on the selling process, if I see they have attempted to build value and increase margin, then I go one more step. Does the customer understand why they are paying a premium? If they don’t, you could lose that customer very quickly in the first year or two based on somebody coming along with a better price. I ask for the most recent proposals over the last 12 months. How did they go to market? If it’s all price focused and there is no value add, you’re at risk of losing customers on price.

There are three legs to build value in a price point or to build margin in an offering.The first one is the value or the quality of the product or service that you are selling. The second one is the value-added services that the customer values. Finally, the value of the people that operate and deliver the services to the customer — and how well the team articulates those values. People will pay more if it’s in their best interest. It’s up to the company to tell them why it is in their best interest and build value around all three.

The Last Word

The No. 1 goal in investing is to protect your investment.Since I started in the hotel business, I always wanted to own a hotel, so I bought a full-service Radisson Hotel in Atlanta. It was at the low point of the recession, right after 9/11. Tourism was truly impacted; hotels were at fire-sale prices. The forecast was that tourism would be impacted for three years or more. I didn’t think it would take that long for the industry to rebound, but they were right. Fortunately, we successfully turned the hotel around and were able to sell it.

Before I invested in the property, I was looking for ways to protect my downside if the hotel did not succeed. I hired a commercial real estate broker to do an assessment of the property and to find out what value the property held as a location without the hotel. It was on 5 1/4 acres. I learned that Best Buy, Circuit City and many big retail stores at the time required 4 1/2 acres for a lot.

I had to find out that the land value would exceed my total debt structure before I made my investment decision. The sale price of the property would need to equate to more than I had invested. Of course it’s my money, so I’m a little more cautious with it. I’ve always learned to think of the worst-case scenario and then how could I protect the downside. I’ve had people tell me I’m overly cautious, but it helps you sleep better at night.

How to reach: City Visitor, www.cityvisitor.com