By Bill Vinck, Excendio Advisors
Background
Buying a business can be a risky, complicated, and expensive process. It’s in the prospective buyer’s best interest to be well prepared when approaching a planned acquisition. Here are six key questions to keep in mind:
1. What are you trying to accomplish in buying a business?
Some buyers are buying themselves a job. The current owner is active in the business and may pay themselves a reasonable salary. The buyer may believe they can replace the owner themselves while paying themselves the same salary. In effect, the new owner is buying a type of annuity. Is that the plan or is this an investment with the owner (or his replacement) remaining in place and you the buyer an investor receiving some type of dividend? Knowing precisely what you are trying to accomplish is key.
2. How do you plan to finance the acquisition?
There is, of course, the cost of the business, the terms of which must be negotiated. There will be the need for cash to close and perhaps payments over time. Almost immediately, a buyer will incur additional cash obligations: legal fees, accounting fees, and business advisory fees. The buyer must have a budget for these. Do you have a budget? Do you have ready cash? How thoroughly have you planned the acquisition and related costs?
If you require a loan, your financials as well as the seller’s will be required. Are your financials in good shape? Are the seller’s? Have you financial institutional relations that will speed the loan approval process? What if they say no?
3. What is your view of timing for a transaction?
You should have a detailed project plan to cover all eventualities. Some tasks are under your control; some are not.
Loan applications and reviews can take weeks and deals may be competitive. Prolonged time periods reduce the likelihood of a happy ending.
Lengthy time periods increase stress all around. Business buying is a time-consuming process. Do you have the time to dedicate to it? Does your team?
4. What’s your “Deal Model”?
A buyer should also have a “deal model” in mind. What are the terms and conditions acceptable to you, the buyer. Will you require the owner to remain active (and be compensated) for a month? Six months? A year? If you agree to annual payments, what will be the source of the funds to make these payments? Will you require an earn-out? If you’re getting a loan, your provider will likely insist on certain terms.
5. What value beyond the purchase do you bring to the business?
This can be a humbling question to answer. The current owner has the business configured to deliver the exact results they are getting.
Can you do as well? Or better? Does your deal model require an improvement in performance to make sense?
If you feel you can do better, what is the plan and budget to accomplish this improvement? What if it fails?
6. What is your due diligence process?
The seller will make certain representations about business performance. Due diligence is the process that reviews these representations.
This includes all financial, operational, legal, and human resources data as a minimum.
Due diligence is the detailed basis for an acquisition go-no-go decision and the area where acquisitions can fail.
Do you have a process in place? Are you able to conduct it yourself? Are you confident in it? Consider having an experienced third party conduct this review on your behalf as much depends upon it.
Conclusion
These six questions are a great start when buying a business. One should create a project plan and budget. Once completed, it’s best to have a team prepared to support you in this process. The team could include you, your accountant, attorney, banker, and a business advisor to help you through the process. Tread carefully as mistakes are expensive.