One of the fastest ways to start or grow your business is to buy a company. The right one can expand your offerings and broaden your customer base. There’s one downside. Buying a business takes resilience considering all the legal, taxes, paperwork, and licensing requirements involved. However, that’s nothing compared to trying to start a new business from scratch.
In spite of these challenges, a company that buys a complementary business will dance up a storm and reap rewards to make it more than worth the effort. After all, you’re getting a ready-made business with experienced employees, office space, and clients. You’ll be able to reach new markets to increase your market share. No searching for employees, no training new employees, and no dealing with leases.
You’ll always need to do marketing to find and keep clients, but it won’t be as big as a challenge with an established business. You’ll inherit the company’s goodwill, something that takes a long time to build.
Here are four critical steps to find and buy the right business.
1. Search for the ideal company.
Some companies don’t announce that they’re for sale. Other companies may not be thinking about selling, but will for the right price and right partner. Since you’re most likely interested in a company in your industry, attend industry events to hunt for potential businesses. It’s worth attending the relaxed social gatherings where people tend to share more information.
In looking into buying a company, some people get excited at the prospect of higher profits. Nonetheless, it’s important to determine the compatibility of the two companies and how well they’d work together. When this happens, the profits will follow.
It’s also critical to look at the culture of the two companies. Everything can look perfect on paper, but turn into a bad match simply because the two cultures don’t mesh. As you fill your dance card, do your due diligence and ask questions. If the company’s representative doesn’t answer them, then that could be a sign not to sign them.
2. Put a team together.
As mentioned before, buying a business has a lot involved and you need a team to confirm you’re doing everything correctly without missing a step. The effort will be more successful if you bring the team together early on in the process.
Here are the ideal players on an acquisitions team:
- Executive: This may be you as the owner or CEO of your company. This person is the leader of the team.
- Certified public accountant (CPA): Reviews the selling company’s financials and tax returns notifying you of any problems and potential tax consequences.
- Qualified attorney: Evaluates offer and purchase agreement. Ensures all acquisitions rules followed.
- PR pro: Bringing on a new company involves change. Customers, employees, and investors may be concerned. The PR pro spins a positive light on the acquisition to reassure everyone affected by the acquisition.
- IT specialist: Evaluates both companies’ hardware and software products and processes to determine the best approach to combine technology.
- HR representative: Addresses issues related to employees for both companies.
- Broker: Helps with negotiations and solving problems. Brokers know the laws and regulations involved with acquisitions. They also know what paperwork is needed and they’ll make sure you have all of it and address any fees. Expect to pay brokers a commission of 5 to 10 percent of the purchase price. You might be able to save money by not bringing the broker in until right before the negotiation phase.
3. Determine — early on — how to finance the deal.
Considering the effort it takes to find a company and put a deal together, it pays dividends to have a plan for financing. Going to a bank for a small business loan isn’t your only option. Even if you don’t have assets, there are other available financing options. Look into private lenders or even the company you’re buying. One option is accounts receivable financing. It gets you the money you’re owed faster.
Some sellers will work out a leasing deal or you may be able to use the company’s assets for a loan. If you decide to make a down payment, refer to your cash flow statement to see whether you have the working capital you need for the future.
4. Verify the selling company’s worth.
How much does gas currently cost? Most car owners know roughly what it costs per gallon. They know when gas is higher or lower than usual. Not many people have experience with buying a business, thus it’s harder to identify a good deal. Brokers can prescreen the company’s financials to figure out the value of the company to ensure you get a fair shake.
Entrepreneur has a helpful checklist of 25 things to consider in buying a company.
A successful acquisition takes two to tango. These steps will aid you in your efforts to make beautiful music together with another company and be like Fred Astaire and Ginger Rogers. It may feel like one step forward and two steps back at times, but these four steps will help you take a step in the right direction.
Have you ever bought a business or had another buy your company? How was the experience? What advice do you have for buying a company?
Image credit: The Library of Congress