Learning how to buy a business is a great option if you don’t want the hassles of starting one. Not only does that save you from having to go through the initial paperwork and other procedures, it also enables you to hit the ground running. On the other hand, if you’re already in the game, buying somebody out is a quick route to increasing your market share and getting rid of a competitor at one go. Having established a case for acquisition, let’s look at the nitty-gritty of how to buy a business.
Acquiring a company is a tricky business, and could be much harder than setting up a new one in certain cases. We’ve prepared a set of quick guidelines on how to buy a business, which can serve as a useful reference. However, before you get around to the buying process, there’s something very important that you need to do, which is to identify what kind of business you’d like to take over. This isn’t as facile as it sounds, but we won’t go into the details here. Instead,
let’s stay focused on how to buy a business.
1. Take a second opinion, and a third: Don’t plunge into something on a whim. You need to arrive at a decision after considering a multitude of factors, such as business imperatives, strategic considerations, financial implications and so on. Given the complexity, it is best to consult a team of advisors, who can guide you in their specialty areas. You will also need the services of a Certified Public Accountant, and can easily find one on CPAdirectory. Your expert advisors might have differing opinions on various issues, which will force you to consider all possible consequences. What is certain is that the quality of decision making will be higher if you include others in the process.
2. Understand the market: The analysis of a business must start with gaining an industry perspective. Enhance your knowledge on industry trends, technological aspects, market dynamics etc. Study the competitor and supplier landscape threadbare. You can take help from trade associations which conduct their own marketing and demographic research which is then published in the form of reports and articles. This will arm you with an independent assessment of market realities, which might differ significantly from the spiel that the target business’ owner gives you.
3. Dissect the business: Now that you have some knowledge on the industry, turn your attention towards the business you wish to buy. Its time to ask some tough questions. Besides financial statements and operational reports, ask to see tax returns and other statutory documents. And make sure you ask the following questions:
- Why is the owner keen on selling the business?
- Is there any history of lawsuits filed against the business or its owners?
- What are the major outstanding and unresolved issues that the company faces?
- What does the owner plan on doing after selling the business?
4. Play hardball: Ultimately the way you structure the deal will depend on your ability to negotiate. Take a team along with you for negotiations, as it is very likely the seller will not show up at the meeting alone! Don’t be in a hurry to close the deal – this is your chance to bargain hard and secure the best terms possible. Once you have a gentleman’s agreement in place, work quickly to put that in writing. This will ensure that the seller does not change his mind subsequently. Make sure all written documents are drafted, scrutinized and approved by your legal and technical advisors.
5. Seal the deal: You will now have to suffer some more paperwork, the most important of which is the actual purchase agreement. Go over it threadbare along with your advisors, before you sign. Once that is done, you become the new owner subject to the fulfillment of the inevitable terms and conditions!
Merely thinking about how to buy a business can cause a lot of anxiety among entrepreneurs, especially if they don’t have adequate experience. So much so, that they may actually give up the idea. We’d like to make sure that doesn’t happen to you. Now that you have a fair idea on how to buy a business, take a step further by reading books like Principles of Private Firm Valuation, or The Integrated Theory of Business Valuation.