We all heard the news when Mark Zuckerberg, the Co-Founder, and CEO of Facebook, acquired WhatsApp in 2014. Even though WhatsApp was doing well in various countries, 19 billion dollars is an amount too big to refuse.
Well, you do not need to be as influential as Zuckerberg to acquire another business. In fact, you don’t always need cash, credit, or experience to acquire a profitable business.
Shocked? Well, the small business acquisition is a systematic process. And if you are smart enough, you can find businesses that are likely to increase double, triple, or even 10 times in value within a year.
Well, if you are interested in buying a small business with a good reputation and an established customer base, you need to learn about the business acquisition process and every step involved in it.
During this due diligence period, you should:
- Hang around the business for a few days; talk to staff, workers, customers.
- Look at the competition and their positions. How are they advertising themselves? How are they doing financially?
- Look at potential future repairs/modifications.
- Look at documents showing liens or judgments that must be paid to the assets.
- Check OSHA and ADA requirements for the facility.
- Make sure there is enough cash flow to support you personally.
- Look at all legal contracts entered into by the current business, including lease arrangements and vendor purchase agreements.
- Analyze the bad debts of the practice, the accounts receivable aging, and the present collection policy.
Some areas to focus on during due diligence:
- Look at monthly gross income for at least three years. Check tax returns for the business for three years or more; cross-check all information against something else.
- Look at overhead (fixed expenses) against national averages (percentage of gross sales).
- Look at employment tax data (941 forms, etc.) and salaries/wages paid out for the past 3 years. Are employment taxes being paid on a timely basis?
- Verify profitability by subtracting overhead and debt from gross income (before expenses). Check against the owner’s income from the business.
- Prepare a list of questions; if you don’t get answers, ask why.
1. Determine what exactly do you want
Before you prepare to initiate the acquisition of a business, you need to identify what you want.
Generally, small businesses with annual revenue of $1 million to $10 million are the best options to consider.
It is recommended to look for business models that have very little investment competition. However, it is always better to pick a business that resonates with your interests and experience.
Also, decide whether you want the owner to train you once the deal is done, or want to hire another professional to manage the day-to-day operations.
2. Evaluate the financial state of the business
No business owner will be willing to share confidential information about his business with you unless you offer to sign a non-disclosure agreement.
When you get the green signal from the owner, check out how much money is going out and how much is coming in, and whether the cash flow has remained consistent over the last few years.
Go through the online algebra calculator and auditing files to have a better understanding. The idea is to ensure whether there is enough profit to cover the cost of financing.
3. Finance the deal as per your convenience
You’ll be glad to know that there are financing options that don’t even require your own capital. There are business owners who will let you pay them back over a longer time period using the business profits.
As it does come with a series of terms and conditions, the experts suggest going through all the terms before binding yourself in such contracts. If they ask for an upfront payment, you have the option to secure a loan from financial institutions that are meant for the acquisitions.
Banks, on the other hand, can use the business profits as collateral. They are least interested in your credit.
It is surprising how negotiable the financing terms are. Usually, parties pay no more than 30 percent of the purchase price during the closing of the deal.
4. Explore due diligence
After you settle on a mutual agreement, you need to focus on due diligence.
You should consult with accountants and lawyers and negotiate a fee structure that is dependent on closing the deal. This will ensure that they do not get to the bill as many hours as they want.
Have talks with the key employees to understand how the business operates and to make sure that they do not leave once the deal is made.
It is important to establish a success plan with these key performers and clarify their roles as well as yours before planning anything else.
5. Respect the existing customer relationships
No matter what plans do you have in your mind for the business, it is important to respect the relationship they have established with the customers over the years.
If you do something to upset the existing customers or make some decisions that hurt the reputation of the business, you are going to be at the receiving end of a lot of hate and anger.
Even if you have acquired the business for its talent, not the product, make sure you take proper measures to discontinue the products without hurting the sentiments of the customers.
6. Don’t focus on insignificant issues
It is advised to retain as many existing team members as possible. As you may realize, every member is the team plays a critical role in a small company.
Losing a senior leader at the time of acquisition can cause problems in the newly-acquired company. Never let any member over inconsequential issues.
Do not make changes in the processes that upset the members to the point of leaving the organization. It is recommended to avoid making any changes that do not have any influence on the financial outcome of the company.
7. Keep the business owner by your side through the transition
You need to have a clear idea about the process to ensure you can execute it. This is where the business owner can assist you in getting a grip on the business operations.
They know how every member of the team works. They can show how things around the company take place. Consider stipulating a handover period just to make sure that they stick around long enough to help you understand the business and all its essential aspects.
In conclusion: Small business acquisition
There are various ways to operate and acquire a business.
But whether you want to remain involved in the day-to-day operations or want others to let others handle the task for you, you now own a business, a valuable asset. And with proper decisions, you may get to witness significant returns as well.
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Shirley Brown is an entrepreneur who runs an e-commerce company with her partners. She has an MBA and is associated with Allessaywriter as a subject matter expert. She helps students with their CPM homework as well as the annotated bibliography.