The Secrets To
ELEVEN STEPS TO BUYING A BUSINESS
Buying an established business can be a difficult and complicated process for many individuals. By understanding the steps involved in an acquisition and doing the necessary planning and preparation, buyers will be able to increase their chances of a successful transaction. Following an established and proven process can not only reduce the stress that often comes with hiring new territory but also eliminate many of the risks and unknowns that often derail business acquisitions.
Personal assessment
Introspection is the initial phase in the business purchase process. This process should be a thoughtful and honest examination of candidates' strengths and weaknesses, skill sets, as well as their likes and dislikes. This analysis will help narrow down the selection of business ventures to the logical and best option to pursue.
What kinds of talents, skills, and experiences do you bring to the table and what kinds of businesses can excel with these traits in the back of your mind? Here are several questions that should be included in the introspection phase:
What sort of enterprise do you wish to operate?
Are you the owner/manager or do you prefer to have a management team?
How many hours are you available to devote to the business?
Obviously, owning a small business is never going to be a 9 to 5 endeavour. Having said that, it is important to determine the time available for running the business. Do you prefer a B2B business that operates Mf 8-6 or would you consider a more flexible and consumer oriented business that is open late or often on weekends?
Are you successful in sales, meeting customers and being the face of the business or are you better suited to a managerial role and running the business behind the scenes with an established sales force?
Are you able to travel and be away from home for long periods of time or do you need a business that will keep you close to family every day of the week?
Do you have a background and expertise in product manufacturing or is a service industry or delivery model more typical for you?
Do you have a license or certification that qualifies you for a particular occupation? If not, are you prepared to acquire the necessary certifications for successful ownership if the target business requires such certification?
What are the things that you are really enjoying? Don't you like doing that? The best advice is to start by looking at businesses in the industry that the buyer is interested in.
These are questions that will help a person assess what type of business they are best suited for and narrow down the range of initiatives where the buyer's skill sets, experiences, abilities and passions can be leveraged.
Develop investment criteria
Now that you have established the type of business that is a 'good fit' the next step is to put pen to paper and briefly define your investment criteria. If you're seeking bank financing, it's important that the investment criteria match your resume or the transferable skills you bring to the table. The investment criteria should mention the following:
What is the price range of a business you can buy?
What is the geographic location of the business you want to buy?
What kind of business are you looking for?
production
Wholesale distribution
service
Retail
Web based
What industry should the business be in?
What type of management structure—owned and operated or managed by a team—is in place?
Size of the business. According to: revenue profit/income
Number of employees number of places
Recurring revenue model vs project based
Lender pre-qualification
If you plan to use bank financing to acquire a business, it's important to get pre-qualified before your search process. This 'prequel' will not only give you data on how good a business you can buy, but it will also prove to brokers and sellers that you are a serious buyer. If you are serious about buying a business and need to get financing, getting a bank pre-qualification is an essential step. So, what could be the reason for initially postponing it and not implementing it?
There are zero downsides and just enough profit. Contact your business broker as they will be able to recommend a financial institution that offers business acquisition loans for the type of business you are looking to purchase. This is one area where having the right lender is important.
Business Search (Individual or Retired)
What process do you follow to identify and qualify businesses for purchase? Will you be doing the search yourself or will you be using the services of a professional business intermediary or broker? There are literally thousands of businesses for sale at any given time.
A process needs to be established to find and manage eligible businesses. Some of these businesses have levels of quality, potential and profitability that set them apart as best of their breed. What have you done to ensure that you stand out and are properly considered when hiring a broker for a business for sale? Businesses for Sale The market is plagued with ready and non-serious buyers inquiring about any enterprise listed for sale.
It takes the right preparation, messaging and professional team to establish communication and quickly reach the point where the business can be qualified as a valid candidate or dismissed. Many potential buyers fall prey to the business internet search process of late and click on any business that interests them. Unfortunately, serious buyers get lost in the area. This is where the pre-stages come in handy – a personal resume, an established investment criteria as well as lender pre-approval.
Ability
A professionally represented business for sale will have several documents available for review by potential buyers (such as financials, list of assets, business summary, etc.). Buyers must execute an NDA in addition to demonstrating that they are worthy of being considered a serious candidate, both from a financial perspective and from an experience perspective.
At this stage the buyer should have already done independent research or have a basic knowledge of the industry. There are trade magazines for any business sector, not to mention the wealth of data available on the World Wide Web without direct industry experience.
The buyer should have a list of questions prepared beforehand, designed for one purpose – determining whether the business meets most of the elements of the investment criteria. The buyer must understand the value of the business.
If the business value is beyond their financial means then they should not value the business and waste no one's time, most importantly their own. It is important for a serious buyer to recognize that there is no such thing as a perfect business and that each has different strengths and weaknesses.
Most buyers are looking for businesses with growing revenue, a steady customer base, excellent employees, established policies and procedures, and growing profits. What are the most important qualities you are looking for? Ranking criteria are often helpful when qualifying businesses. Finding a business that meets some of the criteria but doesn't meet all of the criteria is more the norm than the exception.
In many cases, the buyer may be positioned and experienced to rectify deficiencies in certain business aspects. Following this approach will enable the buyer to quickly and efficiently eliminate businesses that will not be a good fit, an effort that will save all parties considerable time. Fast numbers are much better for everyone than slow numbers. Finally, the buyer should understand that the better the business, the more they can expect to pay.
After the initial information exchange, the buyer should prepare a second set of questions based on the specific business description. After receiving this information comes the time when the buyer finds out whether their basic criteria have been met or not. The buyer needs to be clear about business valuation, financials and business operations and the seller (through a broker) needs to be clear about how the candidate will finance the transaction.
A teleconference should be arranged by the business broker to fill in any gaps in information and to allow specific business questions to be asked by the buyer and to be answered directly by the seller. If this interaction meets the needs of all parties, often a personal meeting and site visit is arranged.
During this meeting, the buyer, seller, and broker can negotiate a transaction structure that will meet each party's needs. Only serious competitors should participate at this time. If the goal isn't making progress, now is not the time to waste being a tire-kicker. Buyers should be clear that even after the NDA is signed, data such as the names of specific customers will not be disclosed not only at this time, but until the transaction closes.
LETTER OF INTENT – RULE LETTER
Letters of Intent (LOI) and Term Sheets are generally non-binding documents that are used for one basic purpose... to determine if there is a difference of opinion between the buyer and the seller on the price and terms of the sale.
The LOI will outline the strategic points of the agreement. Investing time and preparing more detailed documents at this stage will avoid misunderstandings and keep key terms from being renegotiated later. Some broad points that need to be addressed include:
Who is buying the business?
What is being acquired (property, stock)
Transaction costs and how that money is paid
Date of Loan Commitment Letter.
Proposed closing date.
Is there a consulting contract and if so, what are the terms?
What are the conditions for closing the transaction?
Loan Commitment Letter
With the LOI executed (signed), the buyer must now obtain a 'Loan Commitment Letter' from the lender. A loan commitment letter is drawn up by the bank and will confirm that the buyer has been approved for financing to acquire the business. The loan commitment letter is prepared after a thorough review of both the buyer's data as well as the target business's data.
Due diligence
Most business acquisition transactions will require bank funding. The bank will have a proven, structured and highly detailed due diligence process and this is the process the buyer should rely on when acquiring business. Why try to reinvent the wheel?
Banks act only on behalf of the buyer and their basic interest is that the buyer is acquiring a business that has the financial structure necessary for the new owner to succeed and repay the principal and interest on the acquisition loan. The bank will provide a DD checklist containing various types of documents, including but not limited to the following:
Financial statements and tax returns. Assets and inventory list an equivalent. Corporate books and records. Contingent Liability
Sales and marketing materials
Employee contracts and benefit plans
Lease of equipment, vehicles and property
Customer and supplier agreements or other agreements
Insurance policy
Purchase Agreement
After the LOI is executed, the Business Agreement for Sale aka Definitive Purchase Agreement (DPA) is usually drawn up by the buyer's 'Transaction Attorney'. If proper care is taken in preparing the LOI, the DPA should be a very simple document to submit. In situations where key contractual elements are not properly discussed or resolved in the LOI, the DPA becomes complex and has a higher level of risk associated with closing the transaction.
After execution of LOI, DD period starts and drafting of DPA should start. The DPA is a binding agreement that covers all aspects of the transaction. The DPA will cover all assets related to the purchase, including but not limited to:
Acquiring assets/stocks
Price, Terms and Payment
Representations and Warranties. contract premium Non-competition agreement.
Lease Assignment
Consent of Landlord
Consulting Agreement
Resource allocation
In most transactions the DPA is executed at the closing table but is not a requirement. Under certain circumstances, Buyer and Seller may elect to execute this Agreement prior to actual closing.
The DPA is the actual agreement that completes the sale of the business. It will include several schedules and exhibits detailing all terms of sale. This is a custom contract and the details, length and partner schedule and level of engagement are based on the specific business.
At this stage the buyer should already set up their new business entity (assuming it's not a stock sale), create business bank accounts, create insurance policies, merchant credit card accounts (if applicable) etc.
The End
Closing should be the easiest part of the process. Why? Because all the above steps have been relentlessly followed by both parties. "Closing" for a sales transaction for a business is simply the process by which both the buyer and seller execute (sign) all the documents that have already been discussed and agreed upon.
Having the right transaction team (transaction lawyers, business brokers and lenders) from the start will make it a smooth process. Each advisor has their own role and when done right, closing becomes a seamless process.
