If you ever dreamed of starting a business, then you probably thought you had to start from scratch. But, did you know that that's not always the case? You can also look into purchasing an existing company, which has its own list of pros and cons.
1. Do Your Research and Due Diligence
If you're purchasing an existing business, then you should do plenty of research prior to making an offer. SBA.gov suggests you "conduct a thorough, objective investigation" by using the following list:
- Letter of Intent - this includes purposed price, the terms of the purchase and the conditions for the sale of the business.
- Confidentiality Agreement - you will not share the seller's information.
- Contracts and Leases - does the location of the business have a lease?
- Financial Statements - review financial statements of the last three to five years of the business with a CPA.
- Tax Returns - also review from the last three to five years.
- Important Documents - this includes employee contracts, customer lists, sales includes.
- Professional Help - have an attorney review the legal documents, and an accountant look over financial records.
Also remember that you'll have to do your due diligence by making sure that all licenses and permits are in order, as well as zoning requirements and any environmental concerns.
2. Assemble a Dream Team
As Carolyn M. Brown states on Inc., you should assemble "an internal working team made up of representatives from finance, sales and marketing, and operations," as well as outside advisors like lawyers, accountants, investment bankers, and valuation experts. For a smooth acquisition, make sure each member has clearly defined representatives, as well as "cohesive thinking and constant communication among team members."
3. Respect Prior Products, Services and Customers
Ben T. Smith, IV has a great point on Business 2 Community, "you must respect what that team built in terms of product and customer relationships," no matter if you are just acquiring the talent or keeping the business intact. Remember, "if you upset their customers or dismiss their product through a lack of respect, you are going to end up with a lot of very frustrated engineers on your hands."
4. Secure Digital Rights
With so much going on, it's incredibly easy to overlook locking up the digital rights of a company. This includes passwords, web domains, and social media and email accounts. As Annette Giacomazzi, owner of CastCoverZ, informs the Wall Street Journal, "Some will try to compete with you as an established brand. A few will be negative and trash the brand. Some will just purchase and hold them, to extort a purchase price."
Additionally, don't forget to have the email accounts from customers, clients, vendors, etc. transferred to you so that can inform them of the acquisitions. If not, your email could end up as spam.
5. Reduce the Purchase Price
If you're looking for ways to reduce the price of the business, then you may want to start by looking for indicators of a distressed sale. Mark Toohey explains on Adroit Lawyers that these indicators could include:
- Business owner is retiring
- Poor financial position
- Urgent sale schedule
- Been on the market for a long time
- Sale price has been repeatedly lowered
- Disputes between the owners
- Changing legislative conditions
- Changing market conditions
Another explanation of the lower price could be performance factors, such as: declining sales, diminished profit margins, poor financial record keeping, or poor administrative or legal record keeping.
Finally, make sure that there aren't any shoddy management practices, like:
- Low returns on investment
- Bad administrative practices
- Bad employment practices
- Threatened or actual litigation
- High number of customer complaints
- High refund or repair claims
- Continual discounting
- Poor marketing results
6. Seek Alternatives to Cash
If you need to acquire a company ASAP but don't have the cash at the moment, then look for funding elsewhere. According to Entrepreneur's How to Buy a Business you can use the following alternatives to finance your acquisition:
- Use the seller's assets. Make a list of all the assets you're buying (along with any attached liabilities), and use it to approach banks, finance companies and factors (companies that buy accounts receivable).
- Buy co-op. If you can't afford the business yourself, try buying with someone else.
- Use an Employee Stock Ownership Plan (ESOP). ESOPs offer you a way to get capital immediately by selling stock in the business to employees. If you sell only non-voting shares of stock, you still retain control. By offering to set up an ESOP plan, you may be able to get a business for as little as 10 percent of the purchase price.
- Lease with an option to buy. Some sellers will let you lease a business with an option to buy. You make a down payment, become a minority stockholder and operate the business is if it were your own.
- Assume liabilities or decline receivables. Reduce the sales price by either assuming the business's liabilities or having the seller keep the receivables.
Something else that I do after I purchase any company is I ask the former owner what his bottom line was. I do this after we concluded everything so he has nothing to lose. I'm very honest with him about what I would have gone up to. This helps me to become a better negotiator in the future. I highly recommend it!
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