Business Development Solutions
The Merger & Acquisition Resource for Growing Companies
In any one year, very few of the many people trying to buy a business are successful in actually buying one. The steps in acquiring a business are far from easy. Research shows that only three percent (3%) of those potential buyers [those that network with brokers, accountants, lawyers, bankers, …] ever buy a company within any given year.
Most potential buyers spend a large amount of time looking at potential acquisitions. However, most simply fail to go through the acquisition process correctly. Most have never made an acquisition before.
The eight basic steps in acquiring a business are:
1. Criteria. Decide on the criteria for your acquisition. For example, your criteria may include: geographical restrictions, type of business, sales, profitability, and personnel. Of course, the amount of the available down payment and your own personal financial strength are also import considerations.
2. Finding a business. This step can be the most difficult because there is no all-inclusive list of businesses for sale like there is in the residential real estate industry. Many of the web sites that list businesses for sale are shown on the "Acquisitions Available" page of my web site. But, no one list is all-inclusive. More importantly, most business owners that wish to sell their business tell no one except maybe their closest advisors.
3. Preliminary review and Pre-Due Diligence. The goal of the preliminary review and Pre-Due Diligence is to identify deal-breaking issues before too much time and expenses are committed. Examples of issues that would cause you to abandon a potential acquisition candidate are: material misstatements in the financial statements, or uncertainty regarding customer or employee retention. You should have a reasonable level of comfort that the potential acquisition candidates fit your criteria and have a reasonable chance of being acquired successfully.
4. Valuation. There are several approaches to valuing a business and no one approach is always right or wrong. One way is to use the Seller's Discretionary Cash Flow (SDCF). This approach indicates how much benefit the business owner is realizing through profit, salary, depreciation, interest expense, and perks. For the most part, the SDCF after an acquisition should exceed the required debt payments and minimum owner's compensation.
5. Negotiation. Negotiations will occur with the Letter of Intent and the Purchase Contract. In the Letter of Intent, the basic terms of the acquisition are worked out. After the Due-Diligence phase, the final terms are agreed upon.
6. Due-Diligence. Due-Diligence is a detailed investigation of all the issues that need to be addressed before four simple questions can be answered. The questions are: Should I make this acquisition? How much should I pay for the business? How should the acquisition be structured? How should I deal with any post-acquisition operating, accounting, and legal issues?
7. Financing. There are dozens of methods and sources for financing. According to business broker industry data, sellers finance part of the acquisition price in about 85% of all acquisitions. Each source has their own niche as to the type of financing, industry preferences, collateral requirements, terms, and geographical preferences.
8. Closing. This can be the easiest step as everyone signs the closing papers, or it can be the most frustrating step as everything falls apart at the last minute because one of the first seven steps was not done properly.
A common mistake is trying to make an acquisition without professional help. If you have never acquired a business before, do not use the process as on-the-job training. Successfully acquiring a business is hard work, but you can do it. Commit yourself to being in the three percent (3%) of those potential buyers that buy a company within any given year.
Of our Business Acquisition Search clients, 75% of our clients successfully acquire a business.
Call if you have any questions on the above article or to find out more about buying or selling a business.
Business Development Solutions
Jay Whitney, President