For a lot of people, acquiring an existing business makes more sense than starting one from scratch. The former option means that someone else has already done the legwork for you, such as hiring employees, establishing a customer base, and so on. Even so, buying a business is far from a simple process and usually involves doing thorough research.
Not sure where to start with your acquisition? Here are five key steps to buying a business!
- Identify a Business to Buy
When looking for a business to buy, you should start with your motive. Are you looking to diversify your assets, make your current operations more efficient, or do something else? Once you know that, you can focus on identifying a business that can survive a change in ownership and still make a profit. Struggling businesses come cheaper, but often aren’t recoverable.
Always consider the business’s reputation among customers. A less-than-great reputation may not be a dealbreaker, but it should certainly influence the negotiations.
- Research the Business
Once you settle on a few businesses that seem interesting, take a close look at their history and finances. This includes their assets, inventory, cash flow statements, employee files, lease and purchase agreements, etc. You should also schedule an intro meeting with the business owner and ask for business information; if they refuse to supply it, it’s best to look elsewhere.
The intro meeting is also a good way to assess the company’s culture. It allows you to see how their employees are treated, what’s brought them where they are, and so on.
- Choose a Deal Structure
When buying a business, you’re likely looking at a stock or asset purchase. The stock purchase involves acquiring both the company’s assets and liabilities. The asset purchase means you’re buying the assets, and only the ones you want. See if your preferred structure is allowed under the business’s rules, e.g. there’s no shareholder buyout agreement that could prevent it.
Keep in mind that both of these choices have different levels of complexity. Talk to your legal counsel or accountant to determine which structure would fit your needs best.
- Due Diligence
Ensure you have collected all the critical information needed to decide upon whether the business of interest is worth purchasing or not.
As part of the due diligence process, make sure you have collected the information needed to identify the factor or those factors that are influencing any success the business is experiencing and how well protected those advantages are with respect to their continued availability to the business once the business is purchased.
- Make an Offer
Once you’re ready to make an offer, take into account market comps, your purchase criteria, and the owner’s expectations. If your initial offer is too low, you risk alienating the owner from the negotiations. If the offer is accepted, you’ll come up with the terms of payment. Most businesses are bought on an installment plan, often with a sizable down payment.
The buyer is usually responsible for drafting the purchase agreement as well. It’s best to have an attorney draft one for you, particularly one experienced in mergers and acquisitions.