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Acquiring a Business? Ask Yourself These Questions First

Completing a business acquisition can be very exciting and rewarding. Set yourself up for long-term success by hiring financial, legal and business advisors to walk you through the process. Here are three key questions to ask yourself in the preliminary stages of an acquisition and then several other items to consider as you move into due diligence.

#1) How Does the Target Business Fit Within My Current Business Strategy and Life Goals?

Before considering the implications of an acquisition, think about and document your current goals and business strategy. Ask yourself:

  • Does this acquisition help me reach my goals? Does the business fit into my strategy?
  • Are there things I will have to stop doing in order to make the acquisition successful?
  • If someone else buys this business, does this lead me to be non-competitive in my current space? If so, what is my next step at that point?

Consult with business advisors, a third party or a friend to clear up any misconceptions or biases you might have. Once you determine the business fits into your strategy, answer the following question:

#2) Do I Have the Required Resources to Make The Acquisition a Success?

The best way to find out is to:

  • Develop and/or review your strategic plan.
  • Review your balance sheet and cash flow position.
  • Build a budget or forecast for 3-5 years.
  • Quantify the people, process and time resources necessary to both complete an analysis of the business and integrate it.
  • Consider the need to obtain outside financial and legal advisors to guide you through financing options, negotiation strategies, and due diligence procedures.

Once you are comfortable with your own business strategy, financials and team you are ready to gather more information from the target company.

#3) What Will I Have to Pay For The Business And How Is The Target Currently Performing?

It’s imperative that you take the time to research and document certain metrics and data.Consider reviewing the following items:

  • Purchase prices for comparable businesses transactions in the marketplace that have occurred for the past three years. Calculate the prices paid for those businesses as a multiple of their sales, revenue and earnings.
  • Financial statements including a balance sheet, income statement and budget/forecast for the next five years for the target. If a forecast does not exist, ask the business owners to determine the key drivers in the financials going forward and what the key assumptions in the financial statements might look like (sales, expenses, profit, capital investments).

Armed with data, build a financial model to calculate metrics like discounted cash flows, internal rates of return and cash payback and have a preliminary discussion about a purchase price range with the seller. This will save time and money if the expectations between parties are vastly different.

As You Move Into The Diligence Review…

If you are comfortable with how the business fits into your strategy, the financial implications and the price, consider the following items as you move into a diligence review:

  • Review key financial and risk areas to develop a closer understanding of the business.  Interview key leaders and review audited financial statements. Review key agreements and contracts (legal, customer, vendor, employee) and any outstanding litigation.    Adjust your financials and price expectations if material financial implications arise.
  • Have legal counsel review key risk areas and draft agreements.
  • Understand if you need a banking partner or a line of credit to meet your financial obligations. (Consider both the purchase price of the business and future capital infusions if needed.)
  • Learn how key partners, vendors, employees and others might view the business combination. Who needs to be informed of the decision or retained as part of the transaction?

Armed with qualitative and quantitative date from diligence, you are ready to draft a purchase agreement and agree on terms.

Completing a business acquisition can be very exciting and rewarding. By considering the items above you will help ensure long term success for both you and your business partners.

Remember, it is just as important to have the courage to walk away from an acquisition that does not meet your business strategy or financial goals. Need help? Contact us!

Carrie GeldreichAbout the Author

Carrie is a Director on the Finance and Advisory team leveraging her broad skill set tackling some of our clients most strategic business issues like strategic planning, developing exit strategies, planning for and executing acquisitions, and financial planning and analysis.  Her personal style is rooted in teamwork and she thrives on collaboration. Her passion lies in helping both businesses and their people succeed. Learn more about Carrie.