A complete guide to buying a business

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One of my first jobs in corporate America, and a remote one, was for a little known, not well known to the average American, but it was a very large and complex software conglomerate called Trilogy Software. For over a year, I worked on an agile M&A team that was responsible for assisting with due diligence, data warehouse management for all due diligence materials, pre-acquisition, restructuring, and finally , commissioning acquisitions in completely remote organizations using internal playbooks. I was involved in about 10 acquisitions over the course of a year and a half. Early on, after working in mergers and acquisitions, I knew I wanted to be involved in buying businesses later in my career in some way, shape or form. I am slowly getting closer to that goal as of the writing of this article here!

In one of my previously published articles, I talked about all the reasons why you should buy a business instead of starting one. There are a number of intrinsically compelling reasons to do so:

  • Existing businesses typically produce cash flow.

  • You are buying a proven business model (product/service or both).

  • You can potentially buy at a discount.

  • A customer base is already integrated.

The fact that you are reading this article is a pretty strong indicator that you have probably decided to take the next step on your path to business acquisition. Before we get too deep into things, it’s important to understand that not all businesses for sale are created equal. Each business will require an individualized approach to creating and tailoring an analysis of its operation, financial health, growth projections, etc.

I’m going to walk you through what it will take for you to hypothetically buy a business, using my personal and professional experiences, as well as my knowledge.

Related: Why Start a Business When You Can Buy One? This is what you need to know.

Where do you find businesses for sale?

Once you’ve committed to exploring buying a business, the obvious next question is where do you find businesses for sale? Here are a few different ideas on where you can start your search journey:

  • Online Marketplace(s): Websites like BizBuySell, BusinessesForSale, and Flippa list thousands of businesses for sale in a variety of different industries.
  • corridors: Business brokers specialize in connecting business buyers and sellers. They can be a great resource for finding businesses that meet your specific criteria.

  • classifieds: Online classifieds and online newspapers are often overlooked, but they can be a gold mine of opportunity. A little research can go a long way.

  • Direct from the business owner: There are business owners retiring and others looking to get out of their current business. These do what I would consider the best opportunities.

  • Your existing network: Look for opportunities in your existing network, friends and family. They may be able to recommend businesses that might be right for you.

Be sure to create and document a lead pipeline for businesses that are for sale, and especially make a note of those not yet listed online. Those will be the golden opportunities that you really want to take advantage of. Your deal flow will become important when you decide to start making multiple acquisitions, if you want to build and grow a portfolio of companies.

How would you go about analyzing the deal?

The first thing I always tell anyone looking to buy a business is that you need to have an attorney and accountant available to help you with all of your specific legal and financial needs throughout the analysis, due diligence, and valuation steps. Even the most seasoned entrepreneurs and business owners have them ready to help when the need arises. When you’re considering buying a business, there are some key facts you’ll want to look at to make sure the deal is right for you.

The profit and loss statement

First, you’ll want to review the profit and loss (P&L) statements and income statements to get an idea of ​​the financial health of the business. Some of the most pertinent questions about profit and loss statements are:

  • If the P&L told a complete story, what would it tell?

  • Are the marketing dollars spent on the business really growing it?

  • How do profits and losses differ in 12, 24, 36+ months?

  • Is the company profitable today?

  • If we look at revenue trends, do they reflect a healthy or unhealthy business?

I would typically have a business owner electronically share (if possible) all relevant documents related to the business in a private repository so that I can thoroughly analyze everything over an agreed period of time. Due diligence is never cut and dry because every business and business opportunity is unique unto itself.

Related: 6 Crucial Considerations Before Buying a Business

Analyzing business operations

From the number of deals I’ve been involved with in the acquisition process, analyzing the operations of the business is second to none after understanding the financial position of the business.

Owning a business is not necessarily for the faint of heart or inexperienced, in my experience. You need to understand some key components of a company’s operations when you analyze it. Again, this is top level business 101 because each niche or industry will have specific details that pertain to it. This is what you are going to do for your potential purchase from the core processes that run the business. We call these five steps a business process analysis (BPA):

  1. Identify a process to analyze that exists today.

  2. Review data on the process that currently exists.

  3. Make a mind map of the process.

  4. Analyze the process.

  5. Develop a plan of “what this process will become” (if you discover holes/problems).

The reason you want to view core processes through this particular lens is because you will identify deficiencies within the business that could be opportunities awaiting you as a new owner. These wins include reduced operating costs, automation prospects, and even process delays or bottlenecks.

How to put a value on the business

The end of the analysis, and probably the most important, is where you determine what you think the valuation of the business is. However, this does not mean that you will only take the selling price of that particular business at face value. There are several valuation models to consider, such as the market value method, the asset-based method, the ROI-based method, the discounted cash flow (DCF) method, and many others. I won’t go into the details of each one, because they are quite technical and really specific to various situations where your legal and financial advisors might be able to better guide you. But some of the questions you’ll need to find out about the valuation include:

  • What is the current market value of the company (if it were sold today)?

  • What is the growth potential?

  • Does the business include intellectual property?

  • Is there any ownership of the model/business (trade secrets, technology, etc.)?

After you’ve had a chance to review all of the documentation provided, it’s important to do a thorough analysis of the entire deal, including the valuation you came up with. You’ll ask yourself, his attorney, and ideally a CPA, the following:

  • What should be the proposed terms of the agreement?

  • What are the risks and rewards of the deal?

  • What are the current and future market/industry trends?

  • How does this acquisition fit into your overall personal investment strategy?

By taking the time to answer all of these questions, you can make a much more informed decision about whether or not buying that particular business makes sense. If you’re confident in everything you’ve come up with, the final step is to present your proposal to the business owner, negotiate, and either close the deal or walk away.

Related: 5 Things You Need to Know About Buying a Business

paying for the deal

The way you acquire your new business or company is also unique. There are almost an infinite number of combinations that can be used to potentially fund the deal. I won’t go into the details of each type, as I’m posting another article on business financing, both traditional and creative. But here are some ways you can buy a business:

  • Friends and family (liquid cash)

  • Personal savings (liquid cash)

  • Traditional bank financing (loans)

  • Seller financing/creativity (loan/promissory note owned by seller)

  • private financing

*This guide is not intended to provide financial or legal advice. Be sure to seek competent legal and financial advice from an attorney and/or a certified public accountant.*

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