The Small Business Owner’s Guide to Acquiring a Business

Buying another company can help small business owners grow quickly, reach new customers, and improve how they operate. However, it also brings challenges like financial pressure, difficulties in combining the two businesses, and differences in workplace culture. 

It’s important to understand how to buy a business to handle these issues well and this article can help you do just that.

This guide is also related to our articles on understanding gross vs. net profit, cash vs. accrual accounting, and how to read a cash flow statement.

This list includes:

• Business acquisition process
• How to buy a small business
• How to value a business for acquisition
• Financing business acquisitions
• Business acquisition strategy

Let’s get started!

Preparing for acquisition

Before even looking at other businesses to buy, you need to be clear about why you are doing it. Ask yourself questions like: how does this move fit into where you want your business to be in the next few years? Are you looking to enter a new market, add a new product line, or simply grow your customer base? 

Always keep your long-term vision in mind.

Here are some things to think about as you assess whether or not you’re ready to buy another business.

• Make sure you’re ready financially: Buying a business requires a good chunk of cash. Make sure you have the funds or can secure them without stretching your current resources too thin. Consider the purchase price, but also the money you’ll need to integrate the new business into your existing operations.
• Industry knowledge: Are you familiar with the market you’re about to jump into? If you’re buying a business in a different industry, you need to get up to speed quickly. Mistakes can be costly.
• Honestly assess your resources: Look at your current team. Do you have the manpower and expertise to handle the acquisition? 

Speaking of manpower, to give your acquisition the best chance of success, you’ll need a solid team in your corner. 

Accountants are not just for tax time; they can help you understand the financial health of the business you’re considering buying. They’ll dig into the financial statements to spot any red flags or areas of concern.

Legal issues can sink an acquisition fast. A good lawyer will help you navigate contracts, regulations, and any legal hurdles that might pop up.

Business brokers are like matchmakers for business buyers and sellers. They can help you find businesses that are up for sale and vet them to make sure they’re a good fit for your goals.

Surrounding yourself with experts who can guide you through the process is giving yourself the best chance for success.

Identify the right business to buy

Choosing the right business to buy is a bit like finding the perfect pair of shoes. It needs to fit well with what you already have and where you want to go. 

Consider size, too. Bigger isn’t always better so make sure it’s a size that you can handle with your current resources.

Think about the location, and whether you need the business to be close to your current operations or if you can manage it remotely; this can impact costs and customer base.

Finally, you want a business that’s financially healthy, or at least one where you can see potential for improvement. Avoid money pits.

How can you find a potential business to buy?

You can find opportunities anywhere, but here are some good places to start:

• • Networks: Talk to friends, family, and business contacts. Sometimes the best opportunities come from your personal network.
  • Business brokers: These professionals can help you find businesses on the market, filter out the bad fits, and find the gems.
  • Online marketplaces: Websites like BizBuySell or BusinessBroker.net list businesses for sale. It’s like shopping online, but for companies.

Once you’ve found a few potential businesses, it’s time to do a quick check to see if they’re worth a deeper look.

Does the business align with your goals and where you want to go? If it doesn’t fit, move on. 

Do some preliminary due diligence with a quick check of the financials, legal status, and market position of the business. You’re not diving deep yet, just making sure there are no glaring issues.

Buying the business

So you’ve identified the business you want to buy, let’s move on to due diligence, negotiating on price, and financing the sale.

Do due diligence by getting into the nitty-gritty

Due diligence is your deep-dive into the business you’re thinking about buying. Think of it as doing your homework before making a big investment, verifying the information you’ve been given and uncovering anything that might have been missed. Remember, the goal here is to confirm that the business you’re considering is as good as it seems and to identify any potential deal-breakers before you proceed further.

Here’s what to focus on:

• Financial: Get into the books. Look at income statements, balance sheets, cash flow statements, tax returns, and any outstanding debts. You want a clear picture of how money moves in and out of the business.
• Legal: Check for any ongoing or past lawsuits, compliance with local and federal laws, employment contracts, and lease agreements. You don’t want any legal surprises.
• Operational: How does the business run day-to-day? Review supplier contracts, employee structure, customer relations, and inventory management.
• Strategic: Understand the business’s place in the market. Who are the competitors? What’s the customer base like? Is the industry growing?

Valuing the business

Now that you’ve done your research, are armed with all the relevant information, and want to proceed toward purchase, it’s time to determine the business’s value. 

There are a few ways to do this. An asset-based valuation adds up all the business’s assets (what it owns) and subtracts the liabilities (what it owes). It’s a straightforward way to see the tangible value of the business.

An income-based approach looks at how much money the business makes, using past earnings and future projections to figure out its value. It’s great for businesses with steady profits.

And finally market value compares the business to similar ones that have been sold recently. It helps you see what the going rate is for businesses like the one you’re considering.

But value isn’t just in the numbers. There are other factors that can make a business worth more (or less) than the financials alone suggest. These include brand value, customer loyalty, and market position. A business that is strong in one or more of these key pillars can be invaluable. 

Negotiating the purchase price

Once you have a valuation, it’s time to talk about the price. Use what youve learned as a starting point for negotiations. If your offer is below the asking price, be ready to explain why. Use your valuation findings to make your case.

Sometimes, the terms of the sale (like payment plans or transition support) can be just as important as the price. Keep these in mind during negotiations.

Financing the acquisition

Now you need to determine the most efficient way to pay for it. Here are your main options, which come with their own pros and cons:

• Personal funds: Using your own money is straightforward but can be risky. It’s putting your own skin in the game and you should be aware of the risk to your personal finances if the business doesn’t succeed.
• Bank loans: Banks offer loans for business acquisitions, but they’ll want to see a solid business plan and evidence of profitability. Make sure you understand the interest rates, repayment terms, and any collateral you might need to provide.
• Seller financing: Sometimes, the seller will let you pay over time. This can be easier to negotiate but may come with higher interest rates. Make sure you’re clear on the payment schedule, interest rates, and what happens if you miss a payment.
• Investors: You can bring in outside investors to fund the purchase. They’ll likely want a piece of the business in return, and you must establish exactly what they expect for their investment, including how much control they’ll have over business decisions.

Negotiating the purchase agreement

Congratulations, you’ve now reached the stage of negotiating the purchase agreement for your potential new business! 

It should include specifics on the following:

1. 1. Price: The agreed-upon amount you’ll pay for the business.
   2. Terms: How and when the payment will be made (lump sum, installments, etc.).
   3. Warranties: Promises the seller makes about the state of the business (like no hidden debts).
   4. Indemnities: Agreements to cover certain losses if things aren’t as promised.

Negotiating is about finding a win-win for both you and the seller. It’s your chance to adjust the price, based on your earlier due diligence findings, set terms that work for both sides, and make sure that you’re protected if something unforeseen arises. 

This is definitely not the time to wing it. Bring in the pros, your legal and financial advisers that can make sure you’re protected and spot issues you might miss. 

Closing the deal

You’re nearly at the finish line. There’s just a few critical steps to take before the business is officially yours. Here’s what needs to happen:

• Final due diligence: A last check to ensure nothing has changed since you last looked.
• Financing: Making sure all your funding is in order. This could mean finalizing loans or transferring funds.
• Legal documentation: Signing all necessary documents to transfer ownership. This includes the purchase agreement and any other legal paperwork.

Transition planning

Once the deal is done, it’s time to merge the new business with your existing operations. Integrating the acquired business might involve combining systems, processes, or even cultures. 

Make sure you communicate with the employees and customers of your new business so they’re in the loop. Employees will want to know about any changes to their roles, and customers will be interested in what the acquisition means for them.

And after the deal is closed, keep up the momentum by reviewing your business plan, setting short and long-term goals, and, of course, closely monitoring performance, being ready to make adjustments as needed. 

Conclusion

Buying a business is a big move for any small business owner. It’s about finding the right fit and making smart choices every step of the way. Here’s a quick recap:

• Start by understanding your business goals and how an acquisition fits into your growth strategy.
• Do a self-assessment of your financial readiness, industry knowledge, and resource availability.
• Build an advisory team including accountants, lawyers, and business brokers.
• Identify the right business to buy by looking at industry, size, location, and financial health.
• Conduct thorough due diligence to examine financial, legal, operational, and strategic aspects.
• Value the business using asset-based, income-based, and market value approaches, and negotiate based on your findings.
• Explore financing options like personal funds, bank loans, seller financing, and investors.
• Negotiate the purchase agreement focusing on price, terms, warranties, and indemnities.
• Close the deal with final checks, financing in place, and all legal documentation signed.
• Plan for transition and integration, communicating with employees and customers.
• Implement post-acquisition strategies to ensure success.

Approach this process with diligence, patience, and strategic planning. Buying a business can turbocharge your growth and expansion, but it’s important to make informed decisions. Take your time, consult with your advisory team, and focus on making the acquisition a success for everyone involved.

Next, check out our articles on how to read a balance sheet, 15 best rayroll books to read in 2022, and 14 common accounting errors and how to avoid them.

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Author: Julia Kelly

Co-founder at Rigits

I write about how small business owners can better understand and utilize their financials for growth.

Julia Kelly