A 10-Step Guide How to Acquire a Business

If you are a business owner who has decided to expand their business through an add-on acquisition or if you are a first-time buyer, it’s always advisable to follow a step-by-step process to successfully acquire a business.

1) Decide what kind of business to buy

Start by defining your target criteria:

• What is your preferred industry, what is your work experience or expertise?
• Are you willing to relocate or do you focus on a specific geographic area?
• What business size, type of entity and number of employees are you looking for?
• How much money are you able / willing to invest?

Having clearly defined target criteria will help you stay focused during your search and ensure to invest in the right business.

2) Find a business

There are multiple ways how to identify a business for sale:

• Go to online buy-side websites and search by using your target criteria.
• Hire a buy-side M&A advisor to do the sourcing on your behalf.
• Reach out to CPAs, Attorneys, and M&A advisors; ask M&A advisors to get on their mailing list for new businesses for sale.

If you decide to search for a business yourself, you will compete with a lot of other buyers and will need to constantly check websites to see when a new business comes on the market. Hiring a buy-side M&A advisor will free your time but will usually come with an upfront retainer.

3) Get Pre-Qualified

Once you’ve identified a business of interest represented by an M&A advisor, you will be asked to get pre-qualified; there are different approaches in the marketplace

• You are being asked to sign (mostly) online a Non-Disclosure Agreement and once completed, you will receive the full prospectus.
• You are being asked to sign an NDA and to provide personal and financial information to prove you are capable to execute an acquisition.

The advantage of the 2nd, more rigorous process is to reduce time spent for the seller and to minimize the risk of breach in confidentiality as only financially pre-qualified buyers will receive the full prospectus and the number of such buyers will be limited. In addition, the marketing documents will be better prepared and often a 3rd party independent valuation will be provided to support the asking price.

4) Review Marketing Package/Evaluate the business

Once you receive the full prospectus, consult with your CPA or advisor for value determination. Perform a local industry analysis and confirm the asking price and terms with your personal investment objectives.

5) Buyer/Seller Introduction

If you decide after reviewing the marketing package to move forward, you will request a buyer/seller introduction. Usually the sell-side M&A advisor will ask you for an initial call to discuss the business as well as your background and investment focus and then set up either a conference call with the seller and subsequently an off location or after hour in-person visit.

6) Make an offer

If the buyer/seller introduction was successful and you would like to move forward, the next step will be for you to make an offer. There are two different types of offers:

• LOI – a letter of intent is a high level, non-binding offer
• OTP – an offer to purchase includes definite action items, outlines deal terms and price and comes with an escrow check

In today’s sellers market, if you want to improve your chances in the acquisition process, we highly recommend to send an OTP not a non-binding LOI.

7) Due Diligence

Once the offer has been negotiated, agreed upon and signed by both parties, you can proceed with due diligence which includes a detailed examination and analysis of all operations carried out by the target company. It is advisable to use a due diligence list which should be regularly updated and shared between all parties.

8) Obtain Financing

Unless the offer is all cash or cash combined with seller financing, you will need to secure bank financing. Usually, the bank will provide a non-binding term sheet and subsequently a bank commitment letter, a legally binding agreement that the lender will provide the loan. If possible, request a list of proven SBA lender from the M&A advisor.

9) Drafting the Purchase Contract

Once due diligence has been successfully completed, the buyer and seller attorneys will work on a Business Sale Agreement (for a stock sale) or an Asset Purchase Agreement (for an asset sale).

• An asset sale has limited liability exposure to the buyer and provides a tax shelter for assets.
• If the business requires licenses or vendor qualifications, a stock sale might be the better option.

10) Closing

As soon as the lawyers have finalized the legal framework and the bank has received all requested information and approved the loan, the closing date will be set and all parties either meet in person or virtually for the final transfer. The closing attorney (most of the time the buyer’s attorney) will be responsible for issuing the funds once the contract has been signed by all parties.

Buying a business isn’t just about numbers on a page. But if the investor follows a disciplined approach in the acquisition process and has a qualified advisor team in place, then the success for a smooth transition is ensured.