Acquiring a new company can be a daunting challenge but an incredibly rewarding one. You’ll want to consider many factors, including identifying your target, knowing your limits and amassing a team of experts. Here are five important considerations on how to buy a business.
The first step in acquiring a new business is to determine exactly what you’re looking for. It’s often helpful to have some hard and fast rules that can be used to immediately refine your search.
This can vary from endeavor to endeavor but some things to consider for your checklist are:
You need to make up a list of wants that fit your personal goal and stick to those criteria to easily eliminate companies that don’t fit.
You want to make sure the enterprise you’re looking to acquire aligns with your own personal strength and experience. Owning the business will certainly push you to grow but it must align with you.
If you’ve spent the last five years working in the HVAC industry and you are passionate about the work, it probably makes sense to buy and HVAC company or similar construction business. The same cannot be true for owning a textile company.
But don’t let your passion steer you outside of basic economic factors. No matter how much you love an industry, if there is no market for that production no business can succeed.
When you’re thinking about how to acquire a new business, you must also match up your finances with the possible venture under consideration.
Often the best business are small companies earning between $1 million and $10 million a year in revenue.
How much money do you have? What are your financing options? How much can you expect to make from the business in the first year? In the next five years?
You should also consider any creative financing options at your disposal. 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 per cent of the purchase price.
You can also consider outside investors in exchange for equity in the company.
Although it’s possible to handle the sale yourself – either by finding a business for sale online or by cold calling those in your area – you should strongly consider relying on expert help, especially if you’re new to acquisition entrepreneurship.
Search for business brokers, investment bankers or mergers and acquisition companies in your area. See if any have direct connections to you. This will help set up a meeting. If not, simply call them up.
Before your meeting you should gather all your financial information, resume and a succinct idea of what kind of business you want to acquire.
You should also prepare a list of questions to ask the broker, including:
An experienced broker should be able to connect you with a business that matches your plan, weeding out obvious non-starters and saving you the hassle.
The actual process of buying a business can be a relatively long one. You’re going to want to do your due diligence to be absolutely sure it’s worth the investment.
You’ll often start with a non-disclosure agreement so the owner(s) feel comfortable letting you look through their financial documents. Pore over as much data as you can get.
Has it been profitable over the last three years? Is there enough profit to cover any financing? These are just a few of the questions you should consider.
Think to the future. Is there a unique way to maximize profits based on your unique skill set?
You can also use this time to speak with the owner or key employees to better understand how the business operates. Who is going to stay once the sale is complete?
Then you’ll have to agree on a purchase price that is amenable to both you and the previous owner.
This can take time so don’t rush it. Be honest about your goals and whether this company fits.
We’ve covered just a few of the important considerations on how to acquire a new company.
It can be very helpful to consider multiple deals to really compare and ultimately hone in what suits your vision.
