How do I buy a business?

10 August 2021 by National Bank
Image of two entrepreneurs preparing a business acquisition

Want to become an entrepreneur? Instead of starting from scratch, why not buy an existing business? Good news: A takeover can make your life easier by saving you from the complex process of starting a new business. Here’s a quick look at the steps involved:

1. Investigate potential businesses to buy

How do I find the right business to buy?

The first step is to determine where you can add value and what existing business is best for you. Whether you’re buying your first business or adding to one you already own, knowledge of the industry is important if you want to boost your growth potential.

You should also seek a business whose values, culture, mission, vision and management style reflect your own values, beliefs, knowledge and expertise.

Once you’ve found a potential match, you’ll likely need to provide a letter of intent and sign a confidentiality agreement to access the target company’s figures and data so you can make an informed decision.

What if a business is failing or being liquidated and looking for a buyer? Is it a good opportunity?

It depends. A struggling business may hold good potential, especially if the purchase price has fallen, but you need to watch out for unwelcome surprises.

Things to ask yourself: Can you make the business profitable again? What further resources will you need? Do you already have them? Can you run the business differently? It could be a great opportunity if you have the skills and know-how.

How do I assess a business’s value?

As with any investment, you want a decent return, which means the business must have good prospects and the price of the transaction must be acceptable to both parties.

You might come across a seller who has already taken certain steps, such as having the business assessed by a chartered business valuator or developing a transfer plan, which can help avoid any number of misunderstandings.

If not, it will be up to you to find experts and specialists to guide you through the takeover process. The first person you’ll need is a chartered business valuator to assess the business’s value.

While there’s no one-size-fits-all rule regarding the price to revenue ratio, remember that all transactions should at least be based on actual outcomes. For example, you could assess:

● The value of tangible assets (equipment, inventory, buildings, etc.)

● Earnings before interest, taxes, depreciation and amortization (EBITDA); a three-year average gives a good indication of cash flow

● Discounted cash flow method

● Estimated rate of return

● Growth potential

● Industry or sector competitiveness

● Recurring revenue

● Profit margin and areas for improvement

Since context and market forces also greatly affect the price of an active business, you should examine similar past transactions (comparables) and put them into context. After this careful analysis, your chartered business valuator should be able to give you a price. If the proposed price is fair, you, the seller and your financial institution should agree on it.

If a seller has put out a call for bids and a number of offers are on the table with yours, determine the maximum you’re willing to pay and don’t exceed it. Paying too much for a business will likely diminish your return on investment.

How do I conduct a thorough review to ensure everything’s in order?

Remember that books and ledgers don’t always tell the full story and that understanding a business’s operations will help you determine its value. Here are some things to consider:

● Staff motivation/desire to stay after a takeover

● Intellectual property for the products and brand

● Cybersecurity measures in place 

● Presence of litigation not reported in the financial statements

● Economic viability of recently signed contracts 

● Return policy, where applicable

● Insurance policy structure

● Validity of professional licences and permits 

● Pay system reliability

Word to the wise: Draw up a detailed checklist and don’t be afraid to use it.

How do I choose what to buy?

You don’t need to buy an entire business at once. For instance, you could buy its operations but lease space at the premises, which would remain the property of the seller. The important thing is to be sure the purchase aligns with your business plan and that you buy only those parts of the company you feel are worthwhile.

Buying assets or shares has benefits and drawbacks for both parties. A number of factors affect this choice, which is part and parcel of negotiations between the parties. Feel free to consult business transfer or takeover experts, who can help you think things through and negotiate effectively.

2. Prepare your business acquisition

Who should I go to for help?

You need to surround yourself with the right people to boost your chances of making a successful acquisition. Since the process can be long and complex, especially for big transactions, you should have the support of:

● The company’s current and future executives

● Your accounting specialists

● Your lawyers

● Your financial institution

How do I ensure the deal is fair and balanced?

Every new business venture has risks. What’s important is that the risks are spread out and shared among project stakeholders, since this helps build creditor confidence and protects everyone involved, including you.

First, you must personally commit to buying the business by making a down payment. You’ll also need to show you can inject additional cash if outcomes fall short of expectations. Shareholders or partners can help back you in this regard. Remember: It is very hard to buy a business without a down payment or additional funds.

You can also keep the seller involved in the business. For instance, the seller may agree to assume part of the risk by granting a credit in the form of deferred payments. The seller’s ongoing financial commitment also tends to be an incentive in ensuring the business succeeds going forward.

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3. Secure financing for the business acquisition

Financial institutions typically provide 4- to 10-year term loans to buy a business.

They’re usually more willing to finance an existing business with a history, assets and an established team than a new start-up.

You must submit a well-structure financial plan that includes:

● The interest-bearing debt to EBITDA ratio

● The fixed-charges coverage ratio

● Your own financial statements with your personal liabilities and assets

● A detailed business plan with fiscal projections for the next 5 years

● The company’s financial statements for the last three years

● Your purchase offer 

● A certified assessment by a recognized expert

● An environmental assessment, where applicable

There are a number of financing options available for acquiring a business. Talk to a financial advisor/business expert.

4. Ensure a successful transition after the business acquisition

What is a good transition plan?

The transition period is important and you should be well prepared. Your action plan should include:

- A schedule of all steps (including shareholder arrivals and departures)

- The division of powers and responsibilities

- The list of files to transfer

You should also consider drafting a development plan that includes at least the following:

- Skills and abilities you need to acquire in the short term

- Information on competitors

- Product development and quality control 

- Personnel management (hiring and training)

- Cost control

- Change and innovation management

Does the seller need to be involved in the transition?

You might want to consider keeping the seller on as an employee for a while to help smooth the transition and lessen your risks. Remember that 12 to 36 months with a seasoned leader who can carry the business forward may well be to your benefit.

It may also be a good idea to plan the seller’s full departure after a certain time to avoid misunderstandings that could be viewed negatively by clients and partners.

How do I show leadership in a positive way?

To assert your leadership, you need to show how you’ll add value to the organization at all levels. For instance:

● Show customers an enhanced service offering

● Present suppliers with your projections for growth in demand 

● Explain your HR vision to staff

● Communicate clearly and without delay to avoid hesitations and uncertainty

Whether this is your first foray as an entrepreneur or an addition to existing operations, taking over a business can be a lucrative venture if you have proper support and, more importantly, are well prepared. Feel free to discuss your project with one of our experts. We’re here to answer all your questions.

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