Did you know that 70% to 90% of all mergers and acquisitions don’t materialize?
Buying a business can be an exacting process. If you don’t pay enough attention, you end up purchasing a lemon that further complicates your life. But, if you are too cautious, you can miss out on an undervalued target that can become a game-changer.
You have to learn how to make many critical decisions while spotting up and downsides. And that is a tough ask for even the most seasoned buyers.
Many people also like to buy an existing business and I saw a brilliant one recently which was a business for sale in Naples FL which I’m going to look into as it just looks amazing.
Here is an in-depth look at five critical things you must consider before closing an acquisition.
1. Get the Right Team for the Acquisition
Evaluating a target business and navigating the ensuing negotiation can be a lot of work for one person. You need to assemble the right team to help you tackle the process to achieve a great outcome.
At the very least, you need to hire an accountant and a lawyer.
Hiring a certified public accountant (CPA) helps you gain professional insight into the books belonging to the target business. The CPA will be your eyes and ears in assessing the financial side of the deal.
With CPAs, you’ll need to hire someone who can comfortably work with the attorney and you. Retaining the services of a skilled but timid accountant won’t help drive the process optimally.
Having an attorney at hand who has experience in business acquisitions helps you process the legal side of the sale. Your lawyer will help you recognize the legal implications of buying the business you need to weigh before finalizing a sale.
Additionally, hiring an experienced lawyer helps you uncover potential legal issues down the road related to the sector the target business operates in. That’s especially crucial in discerning the more nuanced legal dynamics that are hard to catch during the sale but which can come back to bite you.
If you have more wiggle room, you can also bring on board an insurance advisor to help assess any malpractice or business insurance needs pre-purchase. In some industries, hiring a broker to navigate the purchase process can also be a vital investment.
2. Due Diligence Is a Must
Every business has its drawbacks, and your job is to uncover as many as you can before paying for it. To conduct due diligence. You’ll need to sign an intent to purchase agreement first.
Singing a letter of intent serves to protect both you and the seller. The document assured the seller that you won’t share pertinent information about the business with outsiders after conducting due diligence.
On the other hand, the non-binding document also prevents the seller from engaging with other potential buyers while running your due diligence process.
You’ll then bring your team comprising your lawyer and accountant for a deeper look into the business. The goal here is to learn as much as possible about the company and make your initial mistakes on paper.
There are some fundamental questions you must resolve as you head into due diligence. Additionally, you’ll need to identify areas to pay up-close attention to during your assessment. These include:
- Gross monthly income over the past three years
- Tax returns over the past three years
- Employment tax data from the past three years
- The overheads and what percentage they make up out of the gross revenue
- Future repairs or modifications
- All legal contracts the business is currently party to
When conducting due diligence, it’s wise to spend some days around the business. Talk to workers and customers to find out more about the internal and external makeup of the firm.
3. Query the Business Model
Buying a company before you have a deep understanding of how it makes money is disastrous. Digging deep into the business model to gain a keen grasp of issues such as:
- How well the business understands (and services) its customer segments
- Whether all business processes create value to ultimately serve the customer
- If the firm efficiently allocates its resources given the opportunity at hand
- How compelling and defensive the organization’s value proposition can be
- Whether the business can continue to create demand
When looking at the business model’s viability, keep the risks and opportunities available in mind. Weighing all these mission-critical issues helps you make a more informed decision with a futuristic outlook.
4. Decide on How You’ll Fund the Acquisition
As you look at the purchase price and how to negotiate it, you also need to pay attention to how you’ll pay for the purchase.
For example, if you already own a business with attractive stock, you can go for a straight equity deal. You buy the company’s shareholding in exchange for your shares.
For buyers looking to conserve their cash at hand and not dip into debt, such an acquisition aligns with their strategy.
Buyers who have an excellent operational reputation but don’t have the cash (or prefer not to use their funds) can opt for a Special Purpose Acquisition Company (SPAC).
Through a SPAC, you can turn to the public markets via an initial public offering (IPO) to raise funds to purchase the target business. Small buyers can talk to the Small Business Administration for loans at friendly terms to help close an acquisition.
Regardless of how you fund the purchase, it should align with your firm’s objectives.
5. Beware of Indecision
Many buyers who go into an acquisition tend to underestimate the rigor involved in decision-making. You’ll constantly make decisions about separate issues that directly bear on the success of the purchase.
If you are not careful, you’ll begin procrastinating due to decision fatigue or fear. So, steel yourself for a series of seemingly endless decision-making sessions where your intellect and instinct need to be fully alert.
Remaining dispassionate can be invaluable in keeping you objective throughout the process to make a successful purchase.
Buying a Business Is Challenging Yet Rewarding
Buying a business gives you room to enter a new sector or expand in line with your strategy. However, the process can be demanding, and you need to plan for it. Make sure you factor in minion-critical issues before the ball starts rolling to avoid making sub-optimal purchase decisions.
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