Challenging times create opportunities. Distressed owners want to sell their companies; eager buyers want capacity and new customers. Locating potential acquisition candidates is the easy part. Informal networking often will yield a few, and a mergers and acquisitions firm can bring in others. Once you get past the formalities, such as signing non-disclosure agreements, the real work begins. Planning and executing an acquisition is a lengthy and exhaustive process.
Assemble your acquisition team. You will need your CPA or chief financial officer and an experienced attorney. Your bookkeepers or company accountants can help, but he may be overwhelmed by day-to-day tasks and may be uncomfortable being a key player in such a momentous decision.
Arrange your financing. Even before you begin talks with prospects, float the idea of a purchase with your present lenders. Get them thinking about expanded lines of credit for working capital and have them consider whether the seller might help you assume the present debt by remaining as a guarantor for a time.
Start your own financial preparations. Do you have cash for a down payment? Are your personal financial statements in order? How will you repay the debt? Consider the cash flow of the deal, the assets of the guarantors and collateral. Lenders will closely examine your debt-to-equity ratios on a before-and-after basis. Run some “what if” scenarios to determine what you can afford.
Conduct the initial feasibility study. An acquisition should fit your strategic business plan and your long-range exit plan for your present business. And when merged with your present operations, the acquired company should have demonstrated sufficient cash flow to pay for itself over a maximum of 3-to 5-year periods.
Conduct preliminary onsite due diligence. Your initial screening is operational and cultural, not financial. Do you like the seller, the business and the employees? Does it seem to “fit” with your present team? No amount of financial due diligence will fix a bad fit.
Conduct more feasibility and sensitivity analysis. Ask your CPA to project the monthly purchase cash flow assuming you pay the seller’s asking price. You will never pay this amount, but it represents a worst-case scenario.
You will ask for reams of monthly financial and operational statistics and analyze them to help you understand seasonal trends, the customer base, weekly averages per truck and so on. Small changes can have a huge impact on profits and cash flow. Incorporate “sensitivity analysis” into your spreadsheets, asking “what if” we do 5 percent, 10 percent or 20 percent worse or better than expected.
Prepare the letter of intent. While technically not an enforceable legal contract, the LOI really sets the stage for the entire transaction. Don’t skimp on the tax or financial review of the LOI by your CPA beforehand. Many items included in an LOI can have huge tax consequences down the road.
Conduct extensive due diligence. Have your attorney and CPA coordinate the due diligence checklists and visit the business site together. There is huge variation in what is accepted here. Negotiate with your advisors the depth of the verification. Be ready to put exactly what you want and don’t want in writing.
Prepare the definitive agreements. Your attorney and CPA will spend much time verifying that everything agreed to by this point is making the final cut and getting into the final purchase or merger agreements.
Close the deal. There are usually really two closings – the purchase transaction and the bank financing. Be ready to spend much time and effort satisfying other attorneys for the lenders.
If you want to buy a company, be ready for what is to come. As one veteran adviser says, the whiskey is not for the closing celebration – it is to help you survive to get there!
“What You Need to Know Before Buying a Business” by Harvey A. Goldstein, Los Angeles Business Journal.
“Buying a Business”, a checklist of tasks that provides an overview of the process.
“Due Diligence – Disclosure Directions” – explains the detailed process of a business purchase and how attorneys and accountants assist in the process.