What Key Aspects Should a Buyer Evaluate When Acquiring a Business?
I have worked with well over 1,000 prospective buyers looking to purchase a business over the past 15 years and I would estimate that probably 80% to 90% do not have a particular business category in mind. I can also say that may who have called my office inquiring about a specific business often end up buying something very different from what they had initially called on. A common question I get is what is a good business to buy? While I do have preferences for specific types of businesses, the better question is what are the key aspects I should evaluate in determining which business to buy? Here would be my top 5 factors a buyer should evaluate to narrow down the options and help determine which business is the best fit for them.
Do I have any related experience I can leverage into this business?
When the economy went south in late 2008, many buyers who had used SBA loans to purchase a business had defaulted on their loans. The SBA evaluated this and determined that one of the key factors why new business owners were not able to successfully operate their business during these difficult times was due to (more…)Read More
Where to Start After Purchasing a New Business
When buying a new business, a lot of time and effort is spent searching for the right fit. Once the decision is made to pursue the deal there is even more work to do during the due diligence process. Finally, if the deal makes it all the way through to closing, it is now time to begin to run the company. To ensure an efficient transition and take over, there are some key steps that a new business owner should take. A common solution for this transition period is the creation of a strategic plan, often referred to as the 90-Day Business Plan.
Often a new business owner will have developed plans for change during the due diligence process and will be eager to dive in and implement changes immediately. However, to ensure a smooth transition, it is important to stay patient and spend time understanding as much as possible before applying a lot of changes that could disrupt the daily operations of the business and potentially create even more discomfort with the employees.
Upon taking over the new company, it is imperative to have a strategy in place with short- and long-term goals that can be accurately measured and carried out to completion. This 90-day plan is often broken down into 30-day sections to what is called a 30-60-90 Day Business plan. The first 30 days would include more introductory type tasks such as announcing the new ownership, and meeting with employees. This is also the time to gain a deeper understanding of the knowledge base of employees, systems, operations, clients and vendors. This time should be spent learning and documenting as much as possible about each area to develop a concise strategy for the coming months. The next 30 days could include a deeper dive into some areas where it has been determined certain changes would benefit the organization through knowledge previously gained. To aid in the execution of changes a list of short-term goals should be created for immediate improvements on some of the low hanging fruit. By the end of the 90 days, some key improvements can be implemented as well as the fostering of a new culture and a more long-term strategy for the business. Some key areas which should be addressed during the 90 Day process include: (more…)Read More
The Importance of Confidentiality When Selling a Business
One principal concern a business owner has when deciding to sell a business is confidentiality, and rightly so. Selling a business is a time-consuming process that can take months depending on the level of preparedness the owner has put into their exit strategy. During this process, it is important that the company maintains discretion when getting the message out to prospective buyers or going through initial due diligence. Word getting out prior to the sale can spark undesirable reactions not only from employees but also from clients, vendors, and competitors.
Once an employee finds out about a potential sale, the word can spread throughout the operation which can reduce workforce leading to the reduction in capacity. Employees will question their future which eventually triggers poor performance and early attrition. This could have a domino effect on the rest of the company and lead to poor quality and customer service. Not to mention a damaged company culture.
Word can also spread to clients who may begin to question why the business is for sale in the first place. For example, could the company (more…)Read More
Key Items to Include in a Letter of Intent when Buying or Selling a Business
One of the first significant steps in the route to buying or selling a business is the signing of the Letter of Intent (LOI). The purpose of the LOI is to express certain understandings and agreements between the buyer and seller of the prospective business and can be viewed as the first step in formalizing the negotiation process. The LOI is non-binding contract between the buyer and seller but may include some binding provisions such as an exclusivity period and confidentiality provisions. This document represents the end of preliminary due diligence and the beginning of the formal due diligence process where the buyer and seller will determine whether this company is the right fit.
While the letter of intent should be detailed enough to ensure that the main material issues are brought to light and potentially negotiated early on, it is also important to understand that more detailed discovery’s will happen during the formal due diligence process. During the formal due diligence process additional issues may surface that were previously not outlined in the LOI and may need to be negotiated prior to the final purchase agreement. Generally speaking, the more that is covered in the LOI the smoother the process will tend to go.
It is common that the LOI will be prepared by the buyer’s attorney and presented to the seller’s Business Broker or M&A Advisor. While it is the M&A Advisors role is to manage the negotiations of the purchase price and deal terms of the agreement, it is strongly recommended that the seller engages a transaction attorney to review and approve the agreement prior to execution as the LOI will set the tone for transaction going forward.
While information will vary depending on the business, some specific items to include in the LOI are:
This section should outline the price offered based on the perceived value of the company, often determined by a multiple of EBITDA as well as many other factors that are specific to the business. Some LOI’s will include an explanation of the assumptions that were used to come to the purchase price. This amount could vary by the time the actual Purchase Agreement is signed and could be subject to change based on various findings during the formal due diligence process. Therefore, including an explanation of the method used could help with any potential adjustments if required. One option to reduce the likelihood of a buyer reducing their purchase price later in the process is to provide additional preliminary due diligence information prior to buyer prior executing an LOI. We have found this especially useful when receiving offers from multiple buyers.
Transaction or Deal Structure
The transaction structure outlines the deal and will determine how the sale of the company will occur as well as cover debt terms and forms of payment. The deal structure can become a (more…)Read More
Significance of Preliminary Due Diligence when Buying or Selling a Business
When pursuing a potential business acquisition, a buyer should have specific criteria in mind in defining the ideal target company. Once a buyer has located the potential prospect, a low cost, high level due diligence should be performed. This initial act of uncovering information can be referred to as the preliminary due diligence process. In this stage the prospect will provide information with minimal supporting evidence as this is more of a cursory review to help evaluate whether to take the next step in the formal, more detailed due diligence process down the road.
Preliminary due diligence should occur after the buyer has determined that the targeted business meets certain characteristics. This can be accomplished during the initial search process by reviewing information from the business listing as well as from the Confidential Business Review (CBR).
The initial search process occurs prior to preliminary due diligence and should provide a high-level view of significant characteristics such as: (more…)Read More