How to Acquire a Business: 7 Essential Details to Consider

Whether you’re looking to break into new markets or eliminate the competition, there are several important factors to consider when looking to acquire a new business, namely:

• What sort of business do you want to buy?
• Where can you find businesses for sale?
• How do you finally close the deal?

This guide will provide an overview of the acquisition process by looking at seven essential details to consider when buying a new business. 

1.   What sort of company do you want to acquire

The first step in this process is determining what type of company you want to acquire. Are you looking to uncover new markets, gain advanced technology, flush out your personnel, or increase market share?

Although some businesses are worth purchasing as investments, it’s better if the company dovetails with your own personal and financial goals.

For example, if you’ve been working as an HVAC technician for the past several years, you might want to strike out on your own. Instead of starting from scratch you could simply purchase an existing HVAC company and skip many years of building up from the ground up.

Or, if you already own an HVAC company and want to expand into home renovations more generally, you instead might consider purchasing an already successful plumbing or electrical company.

2.   How to find the right company to purchase

Once you settled on the company you want to buy, the next step in the business acquisition process is to actually go out and find one that fits your needs. This can be a lengthy process so don’t rush it.

There are a number of ways to go about this, including:

• Online business sites like bizbuysell,com or linkbusiness,com.
• Ads on Craigslist or Kijiji.
• Reaching out to industry connections.
• Working with a broker.
• Working with an acquisition accelerator like Acquira.
  
  

You could also consider simply cold calling local businesses that fit your criteria, however, this process is likely to be the most arduous as most of the responses you receive will likely be “not interested.”

3.   Understand why a business is for sale

The next thing to consider when acquiring a small business is to understand why it is on the market. Sometimes the owners may be motivated to sell because of a lifestyle change, perhaps they’re looking to retire or are keen to assume a new challenge.

However, you should be wary of businesses that are simply not working for any number of reasons, from a bad business plan to a brand issue or a bad location.

It is helpful to do a bit of research by chatting with the existing owners, employees, or even customers.

4.   Do your acquisition research and due diligence

This is perhaps the most important phase when taking over a company where you should learn everything you can, including:

• Financial data from the past several years.
• An overview of employees.
• A look at its existing customer base.
• Any tax liabilities or any other claims against the business.

You will need to enter into a nondisclosure agreement (or NDA) with the current owners before receiving financial data. This way they’ll feel safe sharing the data you need to determine if the sale is a worthwhile one.

Chat with employees to determine whether key players are sticking around post-sale. Make sure revenue hasn’t been declining or the business is in a compromised position, which can be caused by issues like over-reliance on a single customer for revenue or a single person in the company holding all the necessary licenses and permits (also known as “keyman risk”).

Consult all the public information you can including, articles about the business or owner, online reviews, SEC filings, etc.

A thorough due diligence process is key to making a sound purchase.

5.   Making an offer and reducing the purchase price

After you’ve done all your research and you’ve settled on a company that fits your criteria, it’s now time to make an offer. This can be a delicate process of balancing your perception of the company’s worth versus the current owner.

You will want to consider what kind of multiples of EBITDA ( earnings before interest, taxes, depreciation, and amortization) are commonplace in that industry. A good general rule of thumb is to pay between 75 to 90 percent of what the company is worth to you.

If the company has seen declining revenue (not enough to discourage your interest), you can leverage this into a lower price. You should also consider sellers who are particularly motivated, perhaps by reaching retirement age or those who seem disinterested in the business.

6.   Seek alternatives to cash during acquisition

Don’t forget to consider creative financing options when buying a small business. Many owners are willing to accept a smaller down payment in exchange for longer-term payments from the company’s profits. You might only need to provide 30 percent of the purchase price in cases like this.

You can also consider outside investors in exchange for equity in the company.

7.   Closing and taking over a company

There are several formal steps to closing your deal including providing a letter of intent stating that you intend on purchasing the business once you’ve done your due diligence. You will ultimately settle on a purchase agreement before officially taking over the company.

Don’t discount the personal connection either, for many this is their life’s work and they want it to be successful even after they’ve left. They can also be an additional resource should you run into problems in the future.

You might be buying a roofing company that has been held by a family for two or more generations. The owners will be insulted by too low an offer. They might also be more willing to compromise if you, too, have spent many years in the same industry and believe you to be a good steward for their successful business.

Conclusion

It is often easier to simply purchase the company you want instead of putting in many years watching things grow slowly. Acquiring an existing company can be a savvy business move whether you’re looking to break into an industry or merely expanding your already successful operation. This guide has provided some of the key factors to consider when acquiring a company.