How Do You Buy a Business?
7 Steps to Consider when Buying a Business
Buying a business of any significant size sounds like a daunting challenge. Here’s the thing: It is. But it can be worth it to overcome the challenge because when a business purchase works out, it is often transformative to the value trajectory of an acquiring company and/or drives a quantum leap of the acquiring company owners’ wealth.
Of course, many transactions take long and winding paths. One of my favorite things to tell clients is that a deal isn’t a deal until it’s a deal, and then it may still not be a deal. Yeah, I can be strange. But most transactions eventually follow these seven steps.
1. Find a business to buy.
This is often the most difficult part. Finding a business to buy isn’t easy. A lot of good businesses aren’t for sale. Many business owners don’t think their businesses are for sale. You’d think it might be easy to just call people and offer to pay them a lot for a business, but it isn’t. You know those phone calls you get from people wanting to buy your house? A lot of business owners get those, too. Your best bet is to work with business brokers, investment bankers, and other intermediaries to learn what companies they are representing. The problem is you’ll almost certainly have competition to buy that company (That is a broker’s job, right? To create a bidding scenario?)
2. Conduct a preliminary investigation.
Once a potential seller doesn’t hang up on you, you need to ask questions to identify deal killers. Such questions might include, “Is your business being sued right now?” “Does any single customer represent more than 25% of your profit?” “Is your business the subject of any government investigation, such as from the EPA?”
3. Appraise the business.
Before going too far into the purchase discussion, you need to know the value of the business and what range of price you might be willing (or able) to pay. To accomplish this, you’ll need the cooperation of the seller who, at a minimum, will require an NDA and may demand a copy of the appraisal. The NDA is probably going to be mandatory, but I’ve seen deals proceed without an agreement to share the appraisal result with the seller.
4. Arrange financing.
If you already have enough cash in the bank to do the deal, then you can skip to step 5. If not, make sure that if you issue a term sheet (step 5), you have the financing to back it up. It is extremely bad form to make an offer that you can’t consummate. I’ve seen advisors resign in such cases.
5. Issue a term sheet.
Set the parameters for what a purchase would look like if everything checks out (it won’t). The term sheet usually covers the parameters for due diligence (especially the duration), the price to be paid, the form of payment, and other terms. The terms in a term sheet are almost always subject to “satisfactory due diligence.”
6. Conduct formal due diligence.
This is where you bring in the CPA, the lawyer, the tech people, and other experts. Their mission is to bring potentially hidden risks into the open. This is usually the most expensive part of the deal and the most impactful. When buyers talk to me about the bad deals they’ve done, they almost always say that they wish they had conducted more and better due diligence. Your valuation may need to be revised.
7. Finalize the deal.
Assuming you can live with the risks that due diligence revealed, you negotiate the price and terms of the deal. This is the most difficult part of the deal process emotionally. By this time, you’ve probably spent six months or more. You’re tired. You’re sick of working on this thing. You just want it done. That’s where mistakes happen. This is where you should lean on your advisors the most.
Buying a business isn’t simple–but it is doable, even for small companies and individuals. The keys are to follow a process and engage an advisory team to accompany you on the journey. Not every purchase process will result in a deal. By nature, you’re probably going to kiss a lot of frogs. There’s nothing special about people or companies that buy businesses, except that they accept the challenge of doing so.
Questions?
Brady Ware offers a comprehensive range of advisory services, including strategic advisory, financial analysis, tax compliance, litigation support, employee stock ownership plans, succession planning, mergers and acquisitions, quality of earnings analysis, tax structuring, and business valuations. Our team of experienced professionals provides tailored solutions to help clients achieve their financial goals, minimize risks, and optimize their business performance. Brady Ware’s advisory services focus on developing solutions and creating pathways to success for businesses facing complex challenges, leveraging their deep understanding of business operations, transactional situations, and personal and ownership legacies.