Buying an existing business offers many benefits for investors, including a level of confidence that can be difficult to obtain when starting a business from scratch. If you choose wisely, you’ll inherit systems and a loyal customer base that will prove invaluable as you take the company to new heights.Of course, it’s also very easy to make colossal mistakes when buying an existing business – especially if you have limited experience. Keep reading for some tips regarding how to buy a business the smart way. We’ll also show you how Acquira can make the process so much simpler, helping you identify the correct business, finance it at a great price, and operate it smoothly.
How to buy a business in 7 steps
Here are a few steps we recommend you follow when buying an existing business. Incorporated in these steps are aspects of Acquira’s acceleration gauntlet, which is designed to guide complete beginners through the entire process of buying a business.
For more detailed information about the gauntlet (including exercises you can take at each step) visit Acquira’s website here.
Step 1: Create an investment thesis
Before you even begin shopping for a business, you’d be wise to create what’s known as an investment thesis. This will help you evaluate businesses systematically and avoid letting your emotions get the best of you.
The process of creating an investment thesis will also help you start thinking critically about the types of businesses you’d be most suited to running successfully. After all, even a great business can collapse under the wrong leadership, which is a very negative outcome both for you as an investor and anyone relying on the company to support their family.
Thankfully, creating a good investment thesis isn’t rocket science. Simply identify two sets of criteria: those that place a business in the “sweet spot” and those that are simply “nice-to-have.” Below is an example of a solid investment thesis.
Operates in the home services sector
Prices its services competitively and has strong reviews
Has a healthy employee culture
Is more than five years old
Has respectably weathered at least one recession
Owner is selling because they’d like to retire
Located in a growing city
Has at least 10 employees, two of which are managers that will be staying on
Solid growth projections
Offers services in several categories
From this thesis, we can discern that the investor wants to buy a decently-sized home service business in a growing city from an owner that is ready to retire. Because the investor has been so specific about what they want, they won’t be distracted by a business that is completely unrelated to their objectives.
Tips for creating your investment thesis
You may be wondering how such an investment thesis gets made. For example, how does the sample investor above know they’d like to focus specifically on home service businesses.
As with every aspect of buying an existing business, this involves systematization. Specifically, as a savvy investor, you should create your investment thesis by carefully considering what type of business you’re most likely to run successfully. Ask yourself the following questions:
What existing connections do I have? If you’ve built up connections in a particular industry, that makes it a strong content for you to buy a business within. It’s very difficult – especially for first-time investors – to break into a new space with zero connections and so much money on the line.
What type of business am I most interested in for reasons other than money? Novice entrepreneurs often make the mistake of buying businesses based solely on the amount of money they foresee making. For example, they may watch a YouTube video talking about how much money someone makes operating an elevator business and then say, “Hey – I want that,” despite having absolutely no interest in running an elevator business. This is a mistake because it’s next to impossible for anyone to systematize and grow a business without having at least some passion for what it offers.
What skills have I developed as a result of prior experiences that may help me as a business owner? This question is related to the first in that your most meaningful professional experiences will likely have occurred in an industry in which you also have strong connections. However, it forces you to think beyond connections alone and consider the actual skills you obtained in that industry. For example, if you’re skilled with HVAC repair, that would be very valuable for helping you revamp a business struggling in that department.
Step 2: Begin looking for businesses that align with your investment thesis and have solid short-term and long-term growth prospects
There are many places you can look for strong businesses to buy. That includes websites such as:
While you can certainly find gems to purchase online, this strategy is not without its faults. For one, by the time a business is listed for sale on an online marketplace, several people within the owner’s real-world network may have passed on it.
To reiterate, this isn’t always true. Many business owners list their companies on marketplaces to gauge interest among a wider field of potential buyers than might be possible in their own network.
However, a lack of quality businesses is a common complaint people have about marketplaces like Flippa, which – more often than not – you’re looking at the b-pile.
This is the advantage of working with a dedicated acquisition team like Acquira. They’ll leverage their professional network to help you find business opportunities that may not be readily-evident to someone casually scrolling through online marketplaces.
In certain industries (i.e. home services), this is a major advantage since even the best businesses are often relatively archaic when it comes to marketing. Owners typically fail to see the value in setting up their own company website properly, let alone taking the time to fill out listings on all the right websites.
Whichever approach you take, however, your goal should be the same – and two-fold:
Identify businesses that align with your investment thesis, hitting all the points on your “Sweet spot” list and as many of your “Nice-to-haves” as possible.
Identify businesses that have strong short-term and long-term growth prospects.
Hitting the first point should be relatively straightforward if you’ve done a good job of creating your investment thesis. Let’s take a closer look at the second point, however.
How to determine a company’s short-term and long-term growth prospects at a distance
To determine a company’s short-term prospects without actually looking under the hood (remember, you haven’t actually bought the company or even begun negotiations at this stage), look at its online presence and ask yourself the following questions:
Is there potential for improved lead generation? You can answer this question by evaluating the company’s website forms along with its Google My Business, Yelp, Angie’s List, and any other relevant listings. You’ll also want to sign up for the company’s email marketing yourself and see how much effort they’ve put into optimizing the flow. Specifically, consider:
whether the correspondence would motivate you to choose the company
how the correspondence compares to the company’s key competitors
how long it takes for an actual human to contact you and nudge you towards purchasing the company’s product or service
Are there any notable shortcomings in the company’s onboarding and customer management process? You can usually glean this information by reading the company’s most negative reviews. Look for complaints regarding communication issues, tardiness, that sort of thing.
The significance of these two points is that – assuming the answer to both is yes – addressing them can lead to immediate growth for the company. These are low-hanging fruits that will increase your likelihood of generating a positive return on your investment immediately after you take over the company.
Of course, short-term growth isn’t all that matters. You also want to make sure the business is poised for long-term growth. Ask yourself these questions:
Are there products or services this company doesn’t offer that many competitors do? If the company’s offerings are inferior to those of its competitors, that may represent a relatively simple avenue for achieving long-term growth.
Do the company’s competitors operate in a wider geographical area? Expanding the company’s geographical footprint is another potential avenue for long-term growth. You can gauge whether this would be spreading the company too thin based on how its competitors approach the question.
Could this business expand into the B2B market? Assuming you’re looking at B2C companies, this is a good question to ask yourself. Slowly inching into the B2B market can be an entirely new revenue stream for the right company. If you’re looking at B2B companies, flip the question and ask yourself whether it might make sense to start offering B2C services.
During the initial stage of shopping for a business, you likely won’t be able to answer any of these questions in a very detailed fashion. That’s why savvy investors typically revisit them once negotiations have begun and they’re able to take a closer look under the hood.
However, simply by asking these questions, you’ll place yourself leaps ahead of investors that don’t think in such a systematized fashion.
Step 3: Do your due diligence
At this point, you’ve likely identified a good business for sale and are ready to get serious. Before you send a letter of intent, however, you’d be wise to do some due diligence. This may involve requesting some more information about the business than is readily available but it still happens prior to the actual purchase process.
We recommend breaking the due diligence process into a few key categories, which we’ll explore now.
Market-based due diligence
Market-based due diligence involves evaluating the company’s position within its industry. Here are a few important pieces of information to gather. It’s not uncommon for business owners to enlist the help of a market consultant when gathering this information.
Size of the serviceable market: This figure will represent the dollar value of the market being serviced. For example, if you were offering HVAC services in a specific city, it would be the value of that city’s HVAC industry. You’ll want to be methodical when it comes to identifying this number. If the city in question is large enough, data might be readily available. Otherwise, you’ll have to identify the number of potential customers seeking services the company offers and then calculate the total revenue up for grabs in the market.
Growth of the serviceable market: Is the serviceable market expanding? By how much? This will help you set reasonable expectations regarding the company’s growth prospects. If the serviceable market is shrinking or stagnant, you may want to consider looking for companies in a more promising region since you’ll have a hard time generating a positive return on your investment, no matter how well you optimize the business.
Market-based positive trends and opportunities: Here’s where you need to ask yourself why the market is poised for growth. Ideally, you want to identify key reasons people need to purchase the products or services offered by the small business you’re looking to buy.
Market-based negative trends and threats: With this point, you need to think critically about potential shortcomings in the industry. For example, is the product or service something people only buy every decade or so? Is it difficult to collect payment?
Alignment with your thesis: As you address the points above, you may find that the business no longer aligns with your investment thesis. In this case, you’ll want to keep looking. The right business will be one that still aligns with your thesis even after you’ve conducted thorough market-based due diligence.
Barriers to entry: What are the difficulties a newcomer to the industry might face? For example, is there any specific licensing that can be tricky to get? Are there major competitors in the area offering competitive wages and benefits that make it difficult to attract quality workers?
Industry growth: While this may seem similar to the point on market growth, there’s actually a very important distinction. Specifically, it involves looking beyond the immediate area in which the business you’d like to buy operates and its prospective customers, instead focusing on the industry’s growth on a national or even international level. If the industry is growing rapidly, this means you can count on continued innovation that will provide new opportunities. If the industry is shrinking, however, this may hint at trouble coming down the pipeline.
The company’s outlook in a recession: How badly would the company struggle during a recession? Would its revenue loss represent an insurmountable problem?
Employee-based due diligence
Employees are the soul of any company. Owners rely on them to deliver quality products and services to customers. Here’s a checklist of the information you need when conducting employee-based diligence prior to sending a letter of intent:
names, salaries, roles, and – if possible – performance reviews for each employee
a list of essential employees that would be difficult to replace
an organizational chart
the names of any employees that are poised to rise within the organization
details of any labor or union issues the company has faced in the past
details regarding who handles key aspects of the business (these aspects will depend on the business itself but may include things like payroll, customer complaints, etc)
Financial due diligence
Financial due diligence, as you can imagine, is incredibly important to do before you agree to hand over hundreds of thousands of dollars for a company. Prior to submitting a letter of intent, we recommend seeking the following information about the company’s finances:
major financial risks (i.e. seasonality, customers excessively concentrated within a single demographic, etc)
habits concerning the company’s cash flow management practices (specifically, accounts payable and receivable)
whether the company’s add-backs are reasonable
whether the company’s expenses leave it with enough room to comfortably operate
Here’s a detailed breakdown of the factors that will help you conduct financial due diligence on a company prior to beginning negotiations on it.
It’s very important that you look into the company’s assets since they can play a major role in determining a fair price for the business. Specifically, ask yourself these questions:
What is the current market value of these assets? How did the company determine this market value? How does the market value differ from the replacement value of the assets?
Which assets will be necessary for operating the business in the way you intend? If an asset is unnecessary for fulfilling your vision, you may want to look into excluding it from the sale price and having the company sell it separately.
What is the cost of maintenance for the assets? When the assets are being maintained, how does this affect business operations?
Which assets are liquid, which would allow you to sell them promptly if you ever experienced the need to?
Are there any liens on the assets? We’ll address this further in the legal due diligence section. However, it’s still important to be aware of liens and their value when looking at a company’s finances.
When looking into buying an existing business, keep in mind that you don’t have to accept their evaluation of their asset values. As with everything else, you can negotiate these prices. In fact, you should absolutely do so if you notice a major discrepancy between the market value of these assets and the value the company is claiming.
Tax returns can tell you quite a lot about how the business operates. For one, while some companies, unfortunately, stretch the numbers in documents provided to prospective buyers, doing so on their tax returns would be a crime.
As such, tax returns generally (but not always) provide a more accurate picture of the company’s financial situation than other documents you may receive during the shopping process.
You’ll want to have a tax professional look at these returns and point out any potential red flags. Acquira uses an external accounting firm for this, which is generally the best way to go unless you happen to be a business tax professional yourself.
Analyzing a company’s financial statements is another crucial part of doing your financial due diligence. Pay special attention to the company’s operating ratio, which is calculated by dividing its operating expenses by its gross operating income.
How do you know whether the operating ratio is good? Easy – compare it to industry data. You can find standard operating ratios for just about every industry imaginable via the Risk Management Association’s annual report.
If you notice the company’s operating ratio is terrible relative to the numbers contained in the most recent report, you’ll want to ask yourself why. If the cause is something you believe you can address, you may simply use the poor operating ratio as a point of negotiation on the deal’s overall price.
However, if the operating ratio is low for a reason you’re unable or unwilling to address, you may decide to walk away from the company entirely.
Most businesses have money sitting in accounts receivable. These are invoices that haven’t been paid yet. If an overwhelming number of accounts receivable is more than 90 days overdue, the likelihood of recouping that money is generally low. You’ll want to address this in any negotiations for the purchase of the company, especially if (as is often the case) the current owner has included accounts receivable as an asset.
Beyond looking at the due dates on invoices, you’ll want to evaluate the creditworthiness of debtors to the company you’re interested in purchasing. Even though some debts may be less than 90 days due, if the debtors have a history of not paying business partners, you’ll want to account for the likelihood they’ll do the same to you.
If your view of the company’s debtors is overwhelmingly negative after you evaluate its accounts receivable, you’ll probably want to ask yourself why that is. Are there issues with the company’s accounts receivable department or are they simply conducting business with unscrupulous vendors? Is this a broader issue within the industry?
Reviewing a company’s accounts payable will give you a very practical view of its financial situation. If the majority of its invoices are overdue, the company may be experiencing cash flow issues.
Additionally, pay attention to any payments that may be coming due within the timeframe you anticipate taking ownership of the business if all goes well. How will this affect its cash reserves?
Legal due diligence
When you purchase a company, you will likely inherit any major legal issues facing it. The solution? Avoid buying a company with extensive legal issues! As part of your legal due diligence prior to submitting a letter of intent, you should look into the following:
whether the company has had any lawsuits filed against it and what the outcome of those suits was; an excessive number of lawsuits and unfavorable judgments relative to competitors can be a sign that something is fundamentally flawed regarding how the company in question does business
whether the company holds any patents, copyrights, trademarks, or other intellectual property
whether the company is violating anyone else’s intellectual property rights
potential issues with lease agreements and other key contracts; specifically, you’ll want to determine whether there will be any issues transferring those contracts to you as the new owner
whether long-term contracts with vendors represent a disadvantage (i.e. the company you’re looking to purchase has an agreement to buy materials at an unfavorable rate)
any liens that might exist on the company or its assets; you’ll want these to be cleared before you take ownership of the company
whether the company requires any particular licenses to operate legally; if so, you’ll want to see if these licenses can be transferred to you and, if not, what the process of getting them yourself might be
Here are the factors that will help you evaluate the aforementioned items.
When buying an existing business, you will typically inherit many of its liabilities. These can include debts taken out against assets, which can limit your ability to sell or use those assets fully as you intend.
Another type of liability novice investors often overlook is the warranties that the company offers. You’ll want to determine exactly what these warranties are along with the percentage of claims that ultimately get filed.
If the company sells a notoriously faulty product, for example, you’ll want to keep in mind that you may be liable for warranty claims well into the future despite never having had the opportunity to use the funds from the initial sale of the product as you saw fit (i.e. setting a certain portion of the profits aside to account for warranty claims, which the current owner may not have done).
Failing to be aware of liabilities like these can result in severe legal consequences down the road.
Most businesses require insurance. Companies operating in specific sectors may require coverage that goes beyond addressing general liability concerns. You’ll want to be aware of any such requirement and whether the company’s premiums are in line with industry norms.
If the premiums are excessive, you’ll want to determine whether the company has any liability concerns that may affect you once you take ownership beyond simply higher insurance costs.
Stakeholder and customer due diligence
This due diligence entails looking at all parties involved in the operating of the company, including its customers and stakeholders such as vendors and other key business partners.
Here’s the information to gather when conducting this due diligence:
a list of all crucial vendors and business partners
who holds these relationships (i.e. if these are the current owner’s contacts and, if so, whether those parties are prepared to cooperate fully with a new owner)
a list of all crucial customers and associated data, such as their lifetime value and how often they place orders; this is primarily important when you’re purchasing a company that operates in the B2B realm
Red flags to look for include proprietary relationships that are unlikely to be passed onto you as the company’s new owner. This can severely affect your ability to operate the business well.
Risk-based due diligence
One last area you need to pay attention to during your initial due diligence is the company’s risk level. Risks generally fall into one of two categories:
Disastrous risks: These are issues you’ll need to address on day one of taking over the company. The consequences of inaction include potentially severe damage to the company’s reputation and ability to operate. These risks include things such as:
Embers: These are issues that require prompt attention yet don’t threaten to burn your business down imminently. That said, they’re still a few steps away from becoming disastrous risks. This can include things like:
a). insurmountable limitations regarding seasonality and cash-flow
b). vulnerabilities to an economic recession, which can happen rapidly with relatively little warning
c). industry-specific vulnerabilities (i.e. a change in technology or legislation that has favored major players at your prospective company’s expense)
d). a decline in the viability of a key revenue stream
e). the threat of crucial employees or managers leaving; it would be expensive to recruit and train replacements
a). shortcomings in management processes that would make it easy for fraud to occur at the company
b). a relatively unfavorable reputation, which can manifest itself in the form of bad reviews online if you’re purchasing a B2C company
c). the threat of lesser employees leaving; you’ll still need to replace them but it won’t be particularly difficult or disruptive to operations
In addition to identifying risks that fall into either of these categories, look into what it would cost to address them. You’ll want to keep this in mind when you progress to the negotiation stage.
Step 4: Determine a fair price for the business
Here’s another step in which investors often rely on consultants. In the previous three steps, you’ve assembled many pieces that will help you ultimately determine a fair price for the company you intend to purchase. How you utilize those pieces, however, can mean the difference between ending up with an accurate valuation and missing the mark completely.
The latter outcome can completely derail the negotiation process, costing you money if you’ve aimed too high or shutting discussions down if you’ve approached the seller with a lowball offer. Here are a few of the most common methods for determining fair valuations of small businesses.
Many novice investors make the mistake of assuming a company’s valuation hinges solely on multipliers. This isn’t true. Multipliers are, however, a great tool for determining a rough estimate of the company’s value.
This method involves multiplying the seller’s discretionary earnings (SDE) by a certain number, which varies depending on the industry.
First, you’ll need to determine the seller’s discretionary earnings. This is done using the following formula:
(net pre-tax earnings + personal draw + discretionary expenses) - liabilities
For the second part of the calculation, you’ll need to determine the appropriate multiplier based on what industry the company in question occupies. Equidam has a fairly reliable and extensive list here.
The key thing to remember when working with multipliers is that savvy investors rarely use this method for anything other than producing a rough estimate of a company’s valuation. The other methods on this list are generally more reliable for producing a fair and accurate valuation.
Fair market valuation
This method is perhaps the most intuitive for valuing a company. It involves looking at what comparable companies have sold for recently. A comparable company will be one that serves the same market (which often means occupying the same geographical area) and is of a similar size.
You may need to work with a business consultant to figure out the exact details of these other deals.
Entrepreneurs looking to value companies in capital-intensive industries (i.e. real estate) will often use this method. It involves simply determining the fair market value of those assets and whatever intangible benefits will be transferred along with them.
Return on investment
This method relies on your ability to accurately predict how your money will grow after you use it to purchase the business. As such, it’s typically only useful when you have a high degree of confidence in the company’s projected earnings and growth.
For example, you might use this method when pricing a business that’s been around for decades and proven itself capable of growing within a certain percentage range through thick and thin.
To calculate your projected return on investment, you’ll need to use the following formula:
(net return on investment / cost of investment) x 100
For example, let’s say you plan on purchasing a business for $400,000. The business is expected to generate a profit of $150,000 in its first year. Your formula would look like this:
($150,000 / $400,000) x 100
This leaves you with a return on investment of 37.5%. How do you translate this into a valuation? It’s simple – consider the valuation of comparable companies and then evaluate your prospective company’s return on investment based on theirs. If your projected return on investment is higher, the fair price will also be higher – and vice versa.
The book value business valuation involves this relatively simple formula:
total assets - total liabilities
While the formula itself is simple, ensuring the accuracy of its inputs is not. You’ll need to very carefully verify the company’s book value before plugging it into the equation. This is why even companies with great experience in acquisitions (like Acquira) typically rely on external accounting firms for determining the fair value of a company.
General tips for valuing a company
Here are some general tips to keep in mind when valuing a company, regardless of which method you use.
Consider additional factors like the economy and the seller’s motivations
When determining a fair price for a business, you’d be remiss not to include factors that go beyond the company’s asset and book values. Two key considerations are the economy and the seller’s motivations.
When it comes to the first of these two factors, it’s important to recognize that businesses often sell relatively poorly during periods of economic hardship. Such periods are typically accompanied by uncertainty, which increases any investment’s risk premium. The result is a lower valuation than might otherwise be expected.
As far as the seller’s motivations are concerned, they can also have a major impact on the fair price. A seller’s motivations will be very different, for example, if they’re looking to retire rather than trying to get out of a business they no longer have a passion for. Savvy investors pay attention to this and price the company accordingly.
If you’re going to use a business valuation service, choose wisely
There are three credentials generally considered to construe the authority required to deliver accurate business valuations. These include:
CBA: A certified business appraiser passes a peer review that verifies their expertise when it comes to valuing companies.
ABV: Those accredited in business valuations have completed 75 hours of training related to the craft. They’ve also passed an exam and hold CPA certification.
ASA: Lastly, an accredited senior appraiser has more than 10,000 hours of experience appraising companies.
Step 5: Line up your financing
You have a few options for financing a business purchase. These include:
Cash: Cash is simple and fairly self-explanatory. Keep in mind, though, that businesses can be quite expensive. Depending on your target industry, you may need to have hundreds of thousands of dollars in cash to fund a purchase entirely. You should also remember to leave enough cash in reserves to cover unexpected expenses that tend to pop up within the first year of ownership. In other words, if you spend all or even most of your cash buying a business, you may be stretched too thin.
Seller financing: This involves the seller agreeing to accept payment in installments. It can convey their confidence in your ability to turn a profit from the company, especially since seller financing repayments often take a back seat to repaying other types of loans.
Employee financing: You may also have the option of selling shares of the company to employees. Most investors who do this sell non-voting shares to ensure they retain ownership of the organization’s direction. Employee financing still offers many benefits to workers, including the opportunity to share in the profits.
Borrowing against company assets: If the company owns considerable assets free and clear, you may also be able to finance a significant portion of the purchase against them. Because this type of loan is secured, it may come with a lower interest rate. However, keep in mind that failure to repay the loan can result in that collateral being seized, which may impact your ability to operate the business.
Traditional bank financing: If you have solid credit and are confident in the company’s financial viability, you may be able to secure traditional financing from a major bank. This financing will typically come in the form of a term loan you’ll need to repay in installments.
One of the most popular financing methods for buying an existing business, however, is the U.S. Small Business Administration Loan. Let’s take a closer look at how that works.
How the U.S. Small Business Administration (SBA) loan works
An SBA loan is guaranteed by the federal government, which gives lenders incentives to take greater risks than they otherwise would have while charging reasonable interest rates. In addition to guaranteeing loans, the SBA provides training and counseling for entrepreneurs.
The result is a program that helps prospective business buyers not only secure funding but also ultimately succeed as entrepreneurs.
Applying for an SBA loan requires the following information and documents, according to the agency’s website:
specific details of the company you’re looking to purchase, including its:
- asset valuation
- asking price
- tax returns
- certificates and licenses
- current ownership
- financial statements
information about yourself, including:
- a statement of personal history
- personal financial statements
- an SBA loan application form
No matter what type of financing you intend to secure, get the ball rolling before you send the current owner a letter of intent. This will help the process flow much more smoothly with no last-minute surprises or disappointments.
Step 6: Send the current owner a letter of intent and begin the process of purchasing the business
By this point, you’ve done a tremendous amount of legwork sorting through numerous business options and doing your due diligence. Now, you’re ready to begin closing in on a business you’ve identified as worthy of your investment.
The first step is to send the company’s current owner a letter of intent. This will communicate your commitment to engaging in negotiations to purchase the company.
A letter of intent is generally not legally binding unless you include specific language in the document confirming your commitment to purchase the company if the seller agrees to the terms outlined in the letter.
More commonly, however, the letter will simply open dialogue and highlight any conditions you as the prospective buyer are hoping for. The letter will usually include the following parts:
A confidentiality agreement applying to all future negotiations: The process of taking a closer look at the company will undoubtedly reveal much sensitive information. Including a confidentiality agreement in the letter of intent can put the seller at ease and make your job of conducting further due diligence easier.
Clauses: Often, the buyer will have certain conditions they’d like to govern the negotiation process. A common clause is that the prospective buyer can walk away at any point in the negotiation without being liable for perceived commitments (barring, of course, an actual notarized commitment to purchase the company).
Step 7: Conduct post-letter of intent due diligence and purchase the business if everything looks good
Once you begin the negotiation process, you will likely have access to more information than was previously available. This is your chance to conduct further due diligence and confirm the company’s suitability.
Here are some areas to revisit during the post-letter of intent due diligence stage.
Employee due diligence
This advanced due diligence should involve:
identifying which employees you would let go or promote upon taking ownership of the company
evaluating the company culture and verifying that it is a good fit for your personality and leadership style
planning how you will address any key parties that seem intent on leaving the company due to issues you may be able to solve
determining whether the current owner was truthful regarding employee roles and salaries
Stakeholder and customer due diligence
Here, you should use your increased access to:
verify contact information for the key vendors, customers, and clients
directly assess existing contracts with the help of a lawyer
Financial due diligence
There’s no reason you shouldn’t have access to the company’s financial books at this stage. This should allow you to:
verify transactions and compare them with things like the contracts and agreements you should have collected during your post-letter of intent stakeholder and customer due diligence; make sure the numbers add up
inspect the physical assets that will be transferred along with ownership of the business
revise your financial forecasting for the company based on the more accurate numbers you now have
Don’t ignore the importance of revisiting due diligence!
It’s very common for novice investors to get excited at this stage. After all, they’re closing in on buying a business they’ve probably been watching and analyzing for months.
This closeness is exactly why we recommend revisiting the aforementioned key areas of due diligence. Once you commit to buy a company, it can be very hard to back out, even in the face of eleventh-hour surprises. Double-check everything and don’t be afraid to involve professionals to ensure everything looks good.
Once you’ve verified everything, the process is fairly straight forward. A purchase agreement will be produced covering just about everything anyone could want to know about the sale, including what is included and any specific clauses.
The purchase agreement will also contain contingencies in case things don’t go as planned (i.e. financing falls through or either party fails to uphold their end of the bargain).
One key aspect of the purchase agreement will be the seller’s representation and warranties, which constitutes their verification that all information they’ve provided you is accurate. This will be your basis for legal recourse if it’s determined anything was grossly inaccurate.
You’ve bought the business! Now what?
If all goes well, you will have purchased the company following the seventh step in the above section. Here are some tips for navigating the ownership transition.
Don’t let your guard down
Hold the seller accountable for promises outlined in your bill of sale and any other agreements. It’s unfortunately common for unscrupulous outgoing owners to take advantage of buyers they feel aren’t paying attention, sneaking a few extra wins.
Take an inventory of all assets that should be transferred to you along with ownership of the company and make sure they’re present.
Offer to bring the outgoing owner in as a consultant
As much as you’ve done your research into the company, nobody knows it quite like the outgoing owner, who has likely devoted decades to it. As such, it’s very common for new owners to bring the seller in as a consultant or even an employee for a set period of time to help with the transition.
Communicate the change in ownership to key stakeholders
The outgoing owner may not have verified the change in ownership with key vendors and other stakeholders. In order to ensure continuity in the company’s operation, you should make sure to reach out to these parties yourself. Even if they’re aware of the change, it’ll be a good opportunity to introduce yourself.
Buying an existing business is by no means a simple process. There are many potential pitfalls along the way. However, we hope this guide has been helpful in showing you how to avoid these pitfalls and make the process of buying a business relatively painless.
For more information about buying a business successfully, sign up for Acquira’s acceleration gauntlet here. The company specializes in not only identifying good businesses but also helping new owners systematize beyond the initial purchase and they will invest in the new business alongside you and will act as your trusted partner.