Written by Richard Hallock
Acquiring an existing business provides many benefits, including existing business and customers, immediate cash flow, and existing brand and goodwill. However, if you are considering acquiring a small business, there are some important business, legal, and financial factors to consider. This article describes 12 important factors to consider when acquiring a small business.
What to do before buying a business
1. Consider multiple business opportunities
It can be helpful to consider sales opportunities for multiple businesses so you can compare and contrast the companies. Search business sales websites like BizBuySell and BizQuest and consider using a business broker to bring you opportunities. Business brokers in your area can be found on the same business buying and selling websites you are already searching for.
2. Do your due diligence
The most important thing you need to do is conduct thorough due diligence on the business you want to acquire. Books have been written about due diligence, and some of the key areas are listed below.
- Review past financial statements and tax returns, especially monthly financials, to spot trends. Have sales been up or down lately? How profitable is your business?
- Check the assets attached to your business
- Check your business debts and other debts
- Review contracts and other responsibilities you want or need to take on
- Perform a business lien search
- Identify important intellectual property such as patents, copyrights, and trademarks
- Consider conversations with key customers
- Search for business reviews on Google or Yelp
- Interview employees to ensure they are competent and able to continue with the business after acquisition
- Check major leases. Will the lease continue? Are there any onerous terms? Do you need to amend the lease term or other terms?
- Can you physically work in the business for a period of time before joining?
- Check the status of inventory, equipment, and physical assets
- Confirm customer information
- Conduct a legal review of a company or LLC's organizational documents
See A Comprehensive Guide to Due Diligence Issues in Mergers and Acquisitions and Due Diligence Checklist – What to Ask Before Buying a Business.
3. Expect to sign an NDA
Most sellers will expect you to sign a non-disclosure agreement (NDA) before providing sensitive information. Although most forms of NDA are standard, sometimes unreasonable terms can be inserted. Please have your attorney agree to this before signing.
4. Find the right business lawyer
Acquisitions have so many legal elements that you need a good business lawyer who has handled many small business acquisitions in the past. See Find the Right Business Lawyer.
5. Set up an LLC or corporation as a buyer
To protect yourself from personal liability in your individual capacity, you may wish to form or use an LLC or corporation as a buyer of your company.
6. Decide what type of business to acquire
Decide what type of business is best for your situation. Is it a brick-and-mortar business or an online business? Franchise? How much personal time can you dedicate, full-time or part-time, to running your business? Ideally, to avoid the “I don't know what I don't know” problem. You want to buy a company whose business you know well.
7. Deciding on the type of acquisition
Ideally, an acquisition would involve acquiring all the assets of a business and assuming only certain debts and contracts to avoid taking on unknown liabilities. However, some sellers may insist on the transaction being structured as a stock purchase or merger for tax reasons.
8. Prepare an appropriate term sheet or letter of intent
Before getting into the complexities and costs of preparing a final purchase agreement, prepare and have the seller sign a letter of intent or term sheet detailing the key terms of the deal to ensure everyone is on the same page. You will need to have it done. page. A letter of intent shows you are serious about the deal. Important terms to include in such a document include:
- Purchase price: Full cash? Partial cash and the rest paid in installments? Will the seller finance it with a promissory note? Do you adjust the price based on collected receivables or working capital at closing? Do you escrow some of the cash in the event of a breach of representations and warranties by the seller? Prices and terms are almost always negotiable Please understand that.
- Transaction structure: asset or stock purchase?
- Exclusivity/No shop period for buyer to complete due diligence
- Main conditions of closing
- Trading timing
- Continued involvement or employment of sales owners to ensure a smooth transition
- Prohibiting competition by selling the owner to prevent the owner from starting a new competing business.
- Seller's confidentiality obligation
- Access to employees and books and records during the exclusivity period
- How to treat employees
- Seller's indemnification obligation
- Seller's Key Representations and Warranties
- How will disputes be handled and in what jurisdiction (preferably by binding arbitration)?
Most clauses in letters of intent and term sheets are non-binding, but buyers will want exclusive due diligence/no-shop clauses to be binding.
For more information, see How to Negotiate a Letter of Intent for a Business Acquisition.
9. Assess your business risk
Is the business highly dependent on the owner or key employees? Are there any significant potential liabilities? Is the business overly dependent on any particular customer or supplier? Are key contracts transferable? Or are you at risk of being cancelled?
10. Preparing financial forecasts
It is helpful for buyers to create a monthly forecast for the business for a year or two after the sale, determine working capital needs, and budget accordingly. Take into account preparation for any problems that may arise.
11. Prepare a suitable acquisition agreement
It is essential that a business attorney drafts a good pro-buyer acquisition agreement. This is a complex contract designed to protect the purchaser and specifically deals with representations, warranties and indemnities. There are thousands of articles on this topic, but here are some of the best.
12. Check permissions and licenses
Check to see if the business has all the appropriate licenses and permits, especially for regulated businesses such as healthcare, childcare, and restaurants. Will you need to modify or obtain new permits and licenses after acquiring a business? Also, ensure that your business complies with zoning and applicable environmental laws.
Systematic and careful consideration of these factors greatly increases the chances of a successful acquisition of a small business.
About the author
Richard D. Harroch is a managing director and global head of M&A at VantagePoint Capital Partners, a venture capital fund in the San Francisco area. He focuses on Internet, digital media, and software companies, and is the founder of several Internet companies. His articles have appeared online in Forbes, Fortune, MSN, Yahoo, FoxBusiness, and AllBusiness.com. Richard is the author of several books on startups and entrepreneurship, and co-author of: poker for dummies This is a Wall Street Journal bestselling book about small businesses. He is a co-author of his 1,500-page book Private Company Mergers and Acquisitions: Analysis, Forms, and Contracts by Bloomberg. He is also a corporate partner and M&A partner at Orrick, Herrington & Sutcliffe LLP, and has experience in startups, M&A, and venture capital. He has been involved in over 200 of his M&A transactions and his 250 startup financings. You can contact him at linkedin.
Copyright Richard D. Hallock. All rights reserved.