How to buy a business

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    Michael David

    Page reviewed by, Michael David, on January 16, 2023 11:19 am

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      Buying a business is a multi-step process. Although the process can vary, these are some of the key steps you should take when looking to acquire an existing business:

      • Define your objectives. Start by knowing why you want to acquire a business, which type of business you want, and how you will measure your success.
      • Assemble a team of advisors. Line up the right professionals to assist you in your new company. Your team might include a business broker and legal and accounting advisors. 
      • Draft an acquisition plan. Map out your timeline, your budget, the role of each team member, the type of company you want to buy. and the risks you’re prepared to accept.
      • Identify a business to buy. Use your personal network, public listings, and professional assistance to find a business that matches your objectives.
      • Draft a letter of intent. This lets the seller know that you are serious and will kick off the formal due diligence and negotiation process. 
      • Conduct due diligence. Closely evaluate the business — its financial status, employees, suppliers, customers, and competition.
      • Negotiate the acquisition price. Determine a fair price to pay for the business and work with the seller to come to an agreement.
      • Arrange financing. Fund the acquisition using some mix of personal savings, investor equity, and debt from a lender or even the vendor themselves.
      • Finalize the deal. Agree with the seller on every term and condition of the sale and sign the paperwork.
      • Transition ownership. Start operating your new business and integrating it with your existing business if applicable. 

      Finding potential businesses to buy

      How do I find the right business to buy?

      Finding the right business for you will depend on the objectives you have set for yourself. Your choice will ideally be a business that works well with your individual skills and interests. It should also be financially sound and have the potential to remain — or become — successful under your guidance.

      One of the questions you will have to ask yourself is whether to buy a franchise or an independent business. Think owning a Second Cup versus owning a neighbourhood coffee shop. Here are some of the major differences:

      • Risk. A franchise generally has a proven track record. Since the concept is proven, there may be less risk. It may also be easier to re-sell your franchise down the road.
      • Brand. A franchise comes with an established brand, and that can make it easier to attract new customers. If an independent business is relatively unknown or its brand has a negative perception, fixing it can be difficult and expensive.
      • Training. An independent business may or may not have good processes in place, and likely won’t offer formal training. An established franchise has already figured out all the details and can offer you support.
      • Control. An independent business puts you in control of every aspect of the business. A franchise will require you to follow their processes and standards.
      • Profit. A franchise requires you to pay a percent of sales to the parent company, but an independent business lets you keep 100% of the profits.

      How do I assess the value of a business?

      The value of a business can be assessed using some combination of its net assets and its earnings. Net assets could include property, equipment, and inventory minus any debts. Often this is multiplied by a factor that reflects how quickly those earnings are growing, plus the general outlook of the business and the sector it belongs to. Because these calculations are partly subjective, the final selling price is usually determined by a back-and-forth negotiation between buyer and seller.

      How do I conduct due diligence?

      Due diligence means thoroughly examining the business before you make a formal offer to purchase it. This often occurs after you have presented the seller with a Letter of Intent (LOI) letting them know that you are interested in acquiring the business. The LOI typically includes a confidentiality agreement, which allows the seller to feel safe sharing sensitive information about the business with you.

      Here are some of the things you will want to study about the business:

      • Sales and other financials. One advantage of acquiring an existing business rather than starting from scratch is that you will go into it with a good idea of how much money you can make based on the previous owner’s sales. Your due diligence process should uncover the net sales figure, which is sales minus expenses. If the business is not profitable, you might get a better deal on the acquisition, but you will also need to go into it with a good strategy to turn things around.
      • Equipment and facilities. Due diligence gives you a chance to examine the condition and maintenance of the physical assets of the business. Everything from repairs and renovations that might be needed, issues related to the location such as foot traffic and logistics, and financial aspects such as leases, taxes, and other financial commitments that will come with the business.
      • Online assets. If the business is partly or wholly web-based, due diligence can include a study of the website and ecommerce infrastructure and its performance. How is everything built? Who maintains it? What expertise is required? How much does it cost to run? Will you need to take over the accounts for things like server space, credit card processing, and IT security?
      • Reputation. Prior to due diligence, online reviews and word-of-mouth might give you some clues as to the reputation of the business. But as you dig deeper, speaking directly with employees, suppliers, industry partners, and even customers can be revealing. If the seller is unwilling to let you speak with some of these stakeholders, you might want to ask why. 

      Planning the business purchase

      Perhaps the most important aspect of planning a business purchase is outline your objectives upfront. Knowing why you want to acquire a business, which type of business you’re looking for, and how you will measure your success can be invaluable when you inevitably have to make difficult decisions down the road.

      Failing to set these objectives can lead to common errors for first-time business owners like using emotional justifications to buy a business that ultimately loses money or one that doesn’t deliver the type of job description or work/life balance they were hoping for.

      Who can support the acquisition process?

      In addition to your inner circle, like family members and business partners, here are some of the outside experts who can support your business acquisition process:

      • Business broker. A broker can help with almost every step, from identifying which business to buy to negotiating a fair price and transitioning into ownership.
      • Lawyer. Professional legal advice can come in handy when you first identify a strong candidate for acquisition and need a letter of intent, as well as towards the end of the process when you need to draft a firm offer and ultimately close the deal.
      • Accountant. An accountant can be helpful during the due diligence process when you are trying to validate the net earnings and other important financial metrics of the company you are considering buying.
      • Financial advisor. Your financial advisor can help you balance your personal financial needs with those of your business, especially if you are using your personal savings to fund some or all of the acquisition. 

      How do I ensure a fair deal?

      The main principles behind getting a fair deal are to first do careful due diligence, perhaps with the assistance of an accountant and a knowledgeable business broker in order to determine the proper valuation of the business, then to negotiate in a disciplined manner for the best price. 

      Emotions can cloud the transaction for both buyer and seller. The seller is proud of the business, attached to what they think it is worth, and potentially under financial pressure to sell for a certain price. The buyer is anxious to start a new chapter and caught up in the excitement. But none of these factors should prevent a sober assessment of the assets, earnings, and fair value of the business.

      How do I secure finance for the business acquisition

      Many small business acquisitions are funded from a mix of the following three sources. First, with equity from savings, investments from friends or family, angel investors, or private equity funds. Secondly,  conventional debt, such as a business loan from a bank. And finally, vendor financing, where the seller agrees to be paid a portion of the sale price plus interest over time through the business’s cash flow.

      How do I plan for the business succession following acquisition?

      There is no rule book for how to take over a new business acquisition, but a good model is to plan for exactly what will happen on day one, aim for some specific early wins by day 30, and set some bigger goals for day 100. 

      If you are merging your acquired business with an existing business, most experts will agree that frequent and candid communication with your staff and partners is essential to maintaining unity and achieving a successful succession following the acquisition.

      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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