Buying a business is a complex process that affects your personal wealth and existing business operations, if applicable. Business reasons for an acquisition are generally linked to growth and may include diversification, risk management and increasing scale or profitability in an existing business. Personal reasons may include becoming a first-time business owner or building a family legacy.
Regardless of how an acquisition opportunity presents itself, setting clear acquisition criteria will help you navigate the universe of potential acquisition targets. Once your criteria have been refined, it is easier to leverage personal and professional networks to find appropriate acquisition opportunities. As is the case with any business transaction it is critical to protect your personal wealth and existing business through this process. This article explores some key considerations for navigating the process of buying a business.
Establish your personal and business goals for the acquisition
Some acquisitions arise from a strategic opportunity. Perhaps a supplier or competitor is for sale and the purchase has the potential to create economies of scale or scope, grow profits, expand product/service offering, or provide access to new geographic markets and customers. A strategic acquisition may increase the value of an existing business in the long-term. It is critical to consider how buying a business will affect your existing operations in the short and long-term. Is there sufficient management to oversee both businesses? Does the acquisition pose any potential risk to your existing business? How will the acquisition be viewed by suppliers, customers, and competitors? What is the long-term benefit of this acquisition for your business?
Other acquisitions may stem from a desire to create a family legacy. Increasingly, families or individuals who have generated wealth from other sources may decide to acquire an existing operating business. Unlike a strategic buyer this type of buyer may not have specific industry expertise but brings valuable business acumen and entrepreneurial ambition. They take a long-term view and typically rely on existing management to assist with day-to-day operations or implement a slow transition period from the outgoing owners to ensure a smooth transfer of corporate goodwill. Private businesses can benefit from new ownership as it may allow them to reach their full potential. For buyers, an acquisition provides the opportunity to create a family enterprise and may generate a significant return on capital in the long term.
Clearly define your acquisition criteria
While some acquisitions are opportunistic, others are made based on a proactive search. For an individual searching for a business acquisition, it is vital to clearly define your investment criteria so that resources are not wasted on opportunities that do not make sense within the context of your personal and business goals. Common factors include:
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Geography: expand into a new market or grow presence in existing market;
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Industry/sector: vertical or horizontal integration, or entry into a new industry;
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Business size: revenue, tangible assets, valuation parameters;
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Revenue characteristics: recurring revenue, revenue concentration, revenue per product/service offering;
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Management team: strength and depth of team, retention of management post-transaction;
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Real estate: own or lease;
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Transaction terms: possibility of vendor take-back, majority or minority ownership; and
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Growth opportunities: capacity for expansion
Leverage professional networks to find appropriate acquisition targets
Identifying acquisition opportunities can be challenging. Once you have narrowed your criteria you can approach your personal and professional networks. Accountants and lawyers often become aware of business owners interested in selling and are a good place to start. Local business brokers and transaction advisors may be able to add you to a list of potential acquirors who receive information regarding acquisition opportunities as they become available.
Keep in mind that sellers may be very concerned about confidentiality and may not want others to know that they are considering selling their business. It could be detrimental to their relationships with customers, suppliers, and employees if people knew the business was for sale. As you leverage your network ensure discretion to protect sellers’ interests.
Protect yourself and your business through the acquisition process
Because a buyer obtains access to confidential information in the acquisition process, it is critical to have proper documentation in place to protect both you and the seller. A non-disclosure agreement (often referred to as an “NDA” or confidentiality agreement) ensures that confidential, proprietary, or non-public information disclosed by the seller will be kept confidential and only used to evaluate whether the buyer wants to proceed with the transaction. If both buyer and seller are disclosing information a mutual NDA would be prudent. This document should be signed prior to receiving any confidential information, whether written or verbal.
Once information begins to flow from the seller the next step is to review the target company’s quantitative and qualitative information to establish valuation. It is critical that you understand how businesses in the industry are priced by potential buyers. This is important to ensure fruitful negotiations that will lead to a successful transaction, particularly if you are participating in a competitive process. This also ensures that you do not overpay for the business.
In the final stages of a transaction detailed due diligence is completed. Having the right external team in place will expedite the process, protect the buyer, and mitigate risk. This may include an accountant experienced in reviewing financial reports and operating documentation as well as a lawyer familiar with the complexity of the acquisition process. The right lawyer will be able to identify potential risks, negotiate effectively, and keep up with the pace of the transaction.
Seek advice
There are several key considerations for navigating the process of a buying a business. The buying process should be given adequate attention and personal and business goals should be clearly defined for the acquisition. A BMO Business Advisory and Transition Planning Specialist can be a trusted resource in helping you understand the process for buying a business.
For more information, please speak with your BMO financial professional.
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