Acquisition Advisors | The Order of Things When Acquiring a Business
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19 Oct The Order of Things When Acquiring a Business

When pursuing a business purchase/acquisition, you want to push the costly and time-consuming tasks down the road, and shore up the major deal points as quickly as possible. As I have said for years, if the ship is going to sink, better now than later (after you’ve spent a lot of time and money). So here is how you should sequence the tasks of a business acquisition in a world where many deals fall apart:

  1. Develop a basic understanding of the business. Do you like it? Might want to own it? If so, …
  2. Assess the true profit history (after recastings) and the actual value of the assets you will receive and liabilities you will assume, and any customer concentration. Ask for the data you need to do so. Then, float a ballpark price. Is the seller willing to sell for a price in that range? If not, what will he accept, and does he proffer any new information that might help justify his higher price? If so, …
  3. Evaluate additional key risk factors such as non-arms-length relationships that might not be available to you when you own it; location needs and risks related to the location of the business, including cost of rent going forward or cost of necessary improvements; concentrations or risk factors in how revenue is sourced or clients secured; and product or service concentrations, i.e., revenue source concentrations, that pose risk.
  4. Provide the seller with a plain English outline of your deal terms. Get his feedback, and try to work out a deal that is acceptable. If you, do …
  5. Draft a plain English description of the deal. Include all the terms you think are relevant and important. This is the letter of intent (LOI). Include things like a stand still agreement; confidentiality provisions; non-compete terms; post-closing assistance; that the business will continue to be run “in the ordinary course”; and when things like due diligence will be conducted.
  6. Conduct initial due diligence on the big things that remain. If after you have reviewed these things you need to renegotiate some things, revise the LOI. Initiate due diligence that requires advisors and will cost money, such as your attorney, accounting, tax expert and environmental. When these reviews are well under way and look acceptable, …Note that none of the above requires outside assistance – unless you are not skilled at reading financials or conducting recastings – and should not require a considerable amount of time.
  7. Initiate due diligence that requires advisors and will cost money, such as your attorney, accounting, tax expert and environmental. When these reviews are well under way and look acceptable, …
  8. Five things here, simultaneously: A) Engage an attorney to draft the purchase and sale agreement and any other legal documents required. B) Apply to lenders for debt finding. C) Work with seller to develop the transition plan. D) Set up the things that will need to be in place for closing and the 1st day of business, such as payroll, accounting, and legal entity(ies). E) Investigate the transferability/ assumability of necessary agreements such as leases, or create new ones that will take the place of the old.
  9. Close the transaction.

If this sounds simple, that’s the purpose. There is a lot of work involved in purchasing a company, but nothing that’s very complex. Just a lot to do. And you want to do the things in the right order. Work on the big picture first, and delay the big time-consumers and money-outlays until as late as possible. Buyers waste a lot of time and money when they get the proverbial cart in front of the horse. For example, no need to begin drafting documents if you don’t yet have a deal agreed to in plain English. Buyers can also lose credibility.

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