A Quick Overview of the Business Acquisition Process

This section is an overview of the buy-sell process that is detailed in the book. Of course, every business acquisition deal is different and no deal will follow these steps to the letter. However, most strategic acquisitions do follow most of the stages outlined here.

Decide on Your Acquisition Goals

(This topic is covered in more detail in Chapter 2 of our book)

Your first step is to determine your acquisition goals. We recommend that you prioritize those goals and note which ones are absolutely essential, which are important but not essential, and which are optional.

Prepare a Target Profile

It's a good idea to sketch out on paper (or computer screen) the characteristics and attributes of your ideal acquisition. These characteristics would include, for example:

• Industry (especially in terms of desired synergies and/or advantages to your company)
• Size range (gross sales)
• Earnings range
• Geographic limitations
• Customer characteristics
• Management characteristics and abilities
• Technological strengths
• Distribution channels
• Customer characteristics
• Modifications that would be need to the company to meet your stated goals

Search for Acquisition Candidate(s)

(This topic in covered in detail in Chapter 3 of our book)

Finding you ideal acquisition may be the most difficult part of the process. Your task is not only finding target candidates that meet your goals, but also approaching and dealing with prospective sellers who may be more than a little apprehensive about selling their companies and even about disclosing sensitive, but essential, information to you.

Evaluate Prospects

(This topic in covered in detail in Chapter 4 of our book)

It's important to decide early on whether a prospective selling company merits serious consideration. If it does not, then there is no point in getting involved in the time consuming and possibly expensive process of further evaluation.

You really need to evaluate both the business itself and the person(s) who may be selling the business. If the company looks to be perfect, but the seller seems to be decidedly unreasonable as to expectations, it's probably not worth going further. That is, you need to make a determination as to whether the owner(s) is reasonably likely to consummate a deal. To an entrepreneur who started and grew a successful company, selling it is as much an emotional decision as it is a financial one. Would be sellers have been known to back out later in the process, after a lot of time and money have been spent.

Assume All is True

When a package of documents is presented to you that includes legalistic warnings that it is unverified and not warranted as to accuracy, it is quite appropriate to be suspicious of that information. However, in the very early stages we advise that you assume (within reason) everything presented to you is true. We're not talking about outlandish claims of potential and pie-in-the-sky projections: we're talking about documents such as financial statements. Do your valuation on this basis. Just make sure that any proposal you make will give you the right to verify that everything presented to you is true and complete, during the due diligence process, and to cancel the deal without penalty if you find material inaccuracies or inconsistencies.

Valuation

(This topic in covered in detail in Chapter 6 of our book)

Valuation is an extremely important element in the buy-sell decision. Many books have been written about it.

At the earliest stage we advise that you determine whether you are in negotiating range. That is, by taking a look at the financials and performing a basic valuation, it is possible to determine a ballpark estimate. Better still, have a third party outsider do this preliminary valuation for you to keep emotions out of it. If you are in negotiating range, of the price set by the seller, then move on to the next step. As a rule of thumb, we figure that if the top of the buyer's range is within 30% of the seller's asking price, we are in negotiating range. If your range is say, $2MM to $2.5MM, and the seller won't take a dollar less than $4MM, it's probably not worth going further unless he revises his price. If, however, the buyer is asking $3MM, it is worth continuing discussions.

Obtaining Further Information

Sometimes it is necessary to get further information before making even an initial evaluation. For example, financial statements give no indication of customer concentration, which can have a significant impact on valuation. Suppose there are two companies in the same industry with identical sales and earnings. However, one has 1,000 customers and the largest customer accounts for 1% of total business. The other company has 100 customers and one of them accounts for 20% of total business and another accounts for 15%. Well, the company with less customer concentration would have a significantly higher value than the later because the risk of a sudden loss of a substantial portion of the business is smaller, despite their identical sales and earnings numbers.

Sellers, especially fence-sitter sellers are understandably resistant to requests for further information before any type of offer or price has been discussed. At this early stage, ask only for the information you absolutely need to make your initial evaluation. At the same time, make it clear that if negotiations go further, you will need more information and any preliminary offer is subject to change based on that further information.

Non-Binding Proposal and Letter of Intent

(This topic in covered in detail in Chapter 7 of our book and here)

Once you have done your preliminary evaluation we advise that you submit a non-binding proposal or "term sheet." This document outlines the terms the buyer may offer. It is designed to determine if the buyer and seller are within deal making range. Be sure that any term sheet you issue is marked with disclaimers such as, "For discussion purposes only" and/or "Not an offer to purchase." Also, if there is further information you will need before issuing a LoI, say so in the proposal.

If your proposal is well received and it looks like you're in deal making range, it's time to submit a letter of intent (LoI). We think of a LoI as an agreement to work toward a firm binding agreement. It outlines the terms of the deal in a bit more detail than the initial proposal does. Be careful: a LoI is a legal document that may involve a commitment on your part. Consult your attorney before issuing a LoI.

Negotiations

(This topic in covered in detail in Chapter 8 of our book)

Chances are the seller will not agree to your LoI without some discussion and modification. Even if he does, LoIs leave many details to be worked out, so unless your proposal is rejected, there will be discussions and negotiations before the formal acquisition document is signed.

Due Diligence

(This topic in covered in detail in Chapter 9 of our book)

Due diligence is the time for full verification. While we advise that early in the process you assume that the information presented to you is true, it is at this stage where you should assume nothing. You, or more likely your accountant and your lawyer, will demand financial and other documents and information to assure that you are buying what you think you are buying, and that there are not significant inaccuracies or misrepresentation in the information that has been presented to you.

Purchase & Sale Agreement

(This topic in covered in detail in Chapter 10 of our book)

The purchase and sale agreement is the formal document detailing the terms of the sale as agreed to by the parties. Loose ends from the LoI are tied up in this document.

Often, the lawyers are working on the P&S while due diligence is underway. Typically, there is a good deal of back and forth between the buyer's lawyer and seller's lawyer as the details are hammered out.

Closing

The closing is the final step in the acquisition process when papers are signed, money changes hands, and the company becomes yours. Traditionally, closings take place in a lawyer's office or conference room with all the parties sitting around a table and signing lots of forms. However, many closings now are largely done using fax and email such that the principles to the deal and their legal advisors are many miles apart.

After the Sale

(This topic in covered in detail in Chapter 11 of our book)

Now that you own your target company, it's time to operate it to make sure it achieves the intended goals.

Your first order of business is to keep your new company's employees and customers happy. Make especially sure you keep the former owner(s), who is probably now your employee, happy.