How to Best Acquire a Business

Buying an existing business starts with choosing the right type of business. As a first step, the investor should choose an industry he/she is familiar with and which best matches existing skills and prior experience.  This will shorten the learning curve after taking over from the previous owner. Next, the investor should consider the size of business in terms of revenue, employees and number of locations. Last but not least, the investor needs to decide on the geographical area in which to look for a potential business.

Most investors start searching for a business online. There are multiple buy-side websites available where an investor can search by industry, location and size of available businesses for sale.

Contacting a Business Broker or M&A Advisor is another way to search for a business. There are different Buy-side agreements Brokers are offering. Most Brokers are simply scanning buy-side websites for available businesses for sale, then offering support in the negotiation process and some due diligence. They then get paid a success fee upon closing a transaction.

To find a business that has not yet been brought to the market, the investor should search for a Broker who offers an exclusive investment search program based on agreed upon target criteria. Once the Advisor has identified a potential target, a comprehensive investment package consisting of a Confidential Memorandum and a 3rd party independent business valuation will be put in place and, after NDA signed off, sent to the investor for review. Such an agreement will carry a small upfront charge in addition to a success fee at closing, but has the advantage for the investor to have the exclusive right to review a business within the defined target criteria, without other buyers bidding on the business at the same time.

Whether the investor decides to hire an advisor or search by him/herself, it is imperative to have the right acquisition team (banker, accountant and transaction attorney) to support the investor in this process.

Once an investor has identified a potential target, multiple steps have to be taken:

The sell-side broker will request a Non-Disclosure Agreement to be signed and the investor should expect to also be asked to send in some background and financial information to ensure only pre-qualified buyers get access to the confidential information and a deal can be completed. Also a big plus is if the broker includes a 3^rd party accredited business valuation in the Investment Package. Not only is the investor getting detailed information how the asking price has been established, but also an accredited valuation is also necessary to obtain bank financing.

Once the investor has reviewed the Investment Package, he/she will consult with their CPA to perform a value determination, a local industry comparison as well as confirm the asking price and terms with personal investment objectives. The outcome of this review should be a list of questions not addressed in the Investment Package.

If there is continued interest in the business, the advisor will set up a buyer/seller introduction to discuss the operation and answer the investor’s questions. Usually the buyer should expect – after a brief introduction – to outline his/her background and experience and to explain why this business is of interest.  Not only is the seller interested to find a buyer who can successfully continue to grow the business, the seller would be very reluctant to offer a seller note if there is concern that such note won’t be paid back. Due to Covid-19, first meetings are often held virtually which – besides reducing personal contact – has the advantage of avoiding employee involvement and ensure confidentiality.

Assuming the introduction went well and the investor wants to move forward with the acquisition, the next step will be the preparation of an offer. A typical Offer to Purchase includes action items and timelines, outlines specific deal terms and price, and includes an escrow check – usually 3%-5% of the asking price. Sellers prefer an Offer to Purchase versus a non-binding Letter of Intent as it identifies serious buyers by putting cash on the table. In addition, the advantage of an Offer to Purchase for both parties is that the framework has been defined and therefore legal costs will be considerably less as the attorneys are only asked to develop a definite agreement and not to negotiate the deal.

Here are important components of a deal structure:

• Down Payment (for SBA financing a minimum of 10% equity is required which can be

split into 5% down-payment from the investor and 5% seller note)

• Bank Financing
• Seller Note (often required to be secured by non business assets)
• Long Term Debt Assumption
• Contingency Payments/Earn Out

Once the offer has been negotiated and accepted by both parties, the due diligence phase begins. Usually, the investor will create a list of due diligence questions and send the list to the seller. Such list will include the request for financial data like tax returns, balance sheet, P&L, inventory, accounts receivables, and payables. The investor might also request detailed customer and employee information, equipment /asset listing and lease information.

The investors’ acquisition team will be essential during the due diligence process – reviewing and verifying the data and confirming the information provided in the Confidential Memorandum and 3^rd party valuation which is the baseline for the agreed upon Purchase Price.

Most of the time, the investor will need to obtain some form of financing, regulatory approvals and if applicable, seek license transfers. In order to shorten the process, it is recommended for an investor to seek out potential funding sources before starting with the acquisition search.

After the due diligence phase has been completed and the Asset Purchase Agreement has been agreed by both attorneys, buyer and seller will meet with their attorneys and the bank to transfer the business. The final purchase price will be adjusted on the day of closing based on the actual amounts of inventory, account receivables and account payables.