How to plan for buying a business

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    Michael David

    Page reviewed by, Michael David, on December 21, 2022 5:16 pm

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      Buying a business can be a complex task. In fact, many people never get past the stage of “just thinking about it” because they don’t know where to start or they find all the decisions overwhelming. But fear not; here is a step-by-step guide to the process of planning to buy a business. All you have to do is take it one step at a time.

      1. Get prepared

      The first place to start is with a little preparation. The actual business acquisition will be a much easier process by first outlining these three things: the right team, a clear picture of what you want to do, and how you plan on doing it.

      2. Assemble a team of advisors

      Although you will be the one driving the process, you can’t do it alone. At a minimum, you will want assistance from a trusted legal advisor to help you structure and sign the deal. You will also need financial advisors who can assist with the financing.

      During the acquisition process, you may want additional support with the valuation of the business and possible lease negotiation. As you take over management of the business, you might consider finding help with taxes, real estate, IT, human resources, and more.

      3. Define your objectives

      One of the most important aspects of preparation is understanding your reasons for acquiring a business and what you hope to achieve. Identifying your personal skills and preferences, your emotional drivers, and your strategic and financial objectives will help you approach things with a level head and identify the type of company that you should acquire. 

      4. Draft an acquisition plan

      An acquisition plan is like a blueprint to help you, your partners, and your advisors stay on track. It can help you remain focused and bring you back to your objectives when you have tough decisions to make. It should cover things like:

      • Your timeline
      • Your budget
      • The role of each team member
      • The type of company you want to buy
      • The risks you’re prepared to accept
      • What success will look like

      5. Identify a business to buy

      There are two broad steps that you must take to identify an existing business to buy:

      1. Source businesses for sale. First, you’ll need to find potential acquisition targets. If you’ve already set your objectives, then you know what type of business this will be — such as a factory, a retail operation, an online business, a consulting service, or a franchise, for example. Then you can leverage your network and use the Internet to surface businesses that are for sale. Talk to people connected to your industry, like operators, business brokers, lawyers, real estate agents, and accountants..
      2. Assess businesses with potential. Once you find a business you might like, the next step is a preliminary evaluation. You’ll want to learn about the business history, cash flow, profitability, customer relationships, existing management and staff, and their reasons for sale. This will help you determine whether you should express your interest and move forward with pre-sale negotiations.

      6. Arrange financing

      Business acquisition financing comes in many flavours, including equity investments (where you and/or others put up cash in return for an ownership stake in the business) and debt investments (when a lender or the seller provides financing, and you pay them back with interest).

      7. Draft and negotiate a letter of intent

      When you are seriously interested in buying a business, a typical next step is to draft an LOI, or letter of intent. This document is not a binding agreement, but it formally initiates a process that includes proposing a preliminary price range and setting out the further research that you will need to do before arriving at a firm offer. The letter of intent can also include a non-disclosure agreement. This allows the seller to feel at ease about sharing sensitive business information with you, so you can properly evaluate it.

      8. Conduct due diligence process

      There is some due diligence that you should conduct before ever reaching the letter of intent stage. You can start by asking yourself the following questions:

      • Is the industry in growth or decline?
      • What opportunities does the business have? How can they be realized?
      • What risks does the company face? How can they be mitigated?
      • Who are the customers? Are they diverse and stable?
      • Who are the suppliers? Are they competitive and reliable?

      Deeper due diligence requires a behind-the-scenes look at factors such as:

      • Financial statements
      • Accounts receivable
      • Accounts payable
      • Bank statements 
      • Tax returns
      • Physical assets
      • Patents and other intellectual property
      • Property and equipment leases
      • Budgets or COGS (cost of goods sold)
      • Inventory
      • Employee details
      • Supplier details
      • Licences and permits
      • Pending legal issues

      The due diligence process can take time and be costly. You may very well need input from an accountant, a lawyer, and other experts who can assist with analyzing the business. Take your time and remember that, if the deal breaks down during due diligence, you have successfully protected yourself from making a mistake. Remember your original objectives and move on to the next opportunity.

      9. Negotiate acquisition price

      If you get through the due diligence process without hitting any dead ends, you will finally be in a position to negotiate an acquisition price. It might be higher or lower than the original range you proposed in your letter of intent. Positive discoveries in terms of earnings, assets, and strategic growth opportunities will add to the company’s value. Negative discoveries in terms of risk, financial performance, or strategic positioning will give you leverage to justify a lower price. Any seller who has made it this far is invested in closing a successful deal, so be courteous and professional — but also firm about what you want.

      10. Secure financing with price in mind

      It is common for a letter of intent to be drafted with a clause stating that the deal is contingent on the buyer’s ability to secure financing. Once due diligence is complete, you should have a clear idea of not only what the business is worth, but what its threshold for servicing debt is and what financial metrics it needs to reach. Armed with this information, you can begin the process of securing a mix of equity and debt financing that will enable you to close the deal and support a smooth and successful transition of ownership.

      11. Finalize your agreement with the seller

      With a price agreed upon and financing in place, there are many other terms of sale that need to be settled and written up by a lawyer.

      For example, you might have to sort out how to manage accounts payable and receivable, payroll as well as other cash flow that is in motion on the sale date. You might also want to negotiate to hold back a certain percentage of the purchase price for a defined period of time while you validate that all the information provided by the seller is as expected. This is also the time that you would document the vendor take-back (VTB) if that is part of your financing strategy.

      There are other variables that may need to be documented at this stage. Those  include the fates of any employees who may or may not continue with you under new ownership, and a non-compete clause that prevents the seller from creating a new direct competitor to your new business.

      12. Merge & integrate

      If you are taking over an existing business, you will hopefully be inheriting a culture and a set of processes that are proven to work. Alternatively, if you’ve intentionally purchased an underperforming business, it’s time to implement your game plan for turning it around.

      Integrate your existing businesses with your new acquisition

      As the new owner of a business, you want to hit the ground running. Before the deal is closed and you are handed the keys, you should have clearly defined the acquisition integration strategy. Two key milestones to consider are what happens on Day 1 and where you want to be on Day 30. Doing this planning can create early momentum and increase the odds that you are operating in an integrated manner within the first 100 days.

      Here are a few of the key planning considerations:

      • Communicate clearly. It is crucial that employees, partners, suppliers and clients are well-prepared for the new world. Failing to communicate well in advance of Day 1 and along the way is a leading cause of failed integrations. Change is always stressful. Do your best to minimize this stress for your stakeholders by heading off surprises and communicating what’s going to happen next.
      • Score early. One way to build momentum and team spirit is to achieve some wins in the first 30 or 100 days. What efficiencies can you realize? What growth targets can you hit? What improvements to your product or service can you achieve? 
      • Track everything. It’s been said that what gets measured gets managed. It’s important to continually compare your results to your plans. Even if you’re falling behind, your plan can provide the roadmap to get back on track. Record the synergies and milestones that you’ve achieved. Keep a running list of the activities that are yet to be completed and any issues that have yet to be resolved.

      Written by

      Michael David

      Michael David is a financial writer and former investment advisor. Writing for Capital Group, Dimensional Fund Advisors, Franklin Templeton Investments, HSBC, Invesco, PIMCO, Vanguard, global insurance companies, major Canadian banks and others, he has educated professionals, business owners and consumers about strategies for investing, insurance, banking and corporate finance for more than 20 years.

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