Buying a business is not something most people do every day and whilst some readers may well be very experienced in this subject, this series of articles is derived from a presentation given by Peter Wilson of Anderson Shaw, at the Business Show at ExCel in May 2019 and is geared towards the novice acquirer of an SME business who has had little experience of the buying process.
Setting Acquisition Criteria:
- Established customer base
- Easier financing
- Systems and processes
- Established employees
- Less risky than starting from scratch
Nothing ever goes 100% according to plan
15 Important Things to Check Off
Here are 15 important things you need to think about when taking over a company, some of these relate to the planning and others the negotiation and research stage and others to the stage when you check out the business in detail.
- Marketing strategies and advertising costs
What types of marketing strategies worked/failed in the past? It’s important that you find out what the numbers were for each channel. What were the costs per acquisition numbers? How much was spent on average per channel? What types of creatives worked/didn’t work? What targeting worked out best? - Financial Records
This is when it’s well worth considering bringing in an accountant to help you. Ask for financial records up to the last 2-3 years and compare the numbers/ratios with any other industry standards you can get hold of, using reports from sites such as Dun & Bradstreet (www.dnb.com). Put all P&L and balance sheet information; as well as any other pertinent data. - Incorporation
Make sure you check that the business is properly registered and if it’s a company check its records at Companies House and verify who its directors / officers are – are the people you’re talking to properly authorised to enter into the discussions? - Contracts & Legal documents
The business should have and hold all relevant legal and commercial documents – it’s worth asking as early as possible that things like partnerships, lease/purchase, subcontractor, sales contract, employee agreements and any other legal documents will be available. If you have any doubts, bring in a lawyer to help. - Sales records
Look for records of sales for the past 2-3 years and pay attention to each category so you have a good understanding of how the business performs. Compare the numbers to the industry and also analyze the top 10-20 accounts for the last year or two. You’re looking for rates (percentages) and patterns to help inform your decisions. - List of liabilities
Are there any restrictions or liens against assets? Any other claims? Bring in a lawyer and accountant to help you sort this out. There could be legal ramifications if you don’t. - Reputation of the business
What are the customers saying? Google the business and see what you come up with. If there are negative results on the Google or other reviews / blogs, dig deeper to see what the real story is. A negative image can be a liability and hurts overall business. - All accounts receivable and payable
Ask for a spreadsheet with all trade debtors/creditors 90+ days beyond. Ask about any significant older unpaid accounts. For debtors, ask about the relationship and what the position is; for creditors – is the company having financial difficulties and not able to pay its debts on time? - Seller-customer ties
Are there any customers with special ties to the seller. Is there a particular deal with a segment of customers that you might not be aware of will these customers continue to buy after the company is purchased? - Salaries
Analyse all the current salaries and look for any inflated salaries. Also look for salaries for people that don’t play an active role in the business (e.g. relatives). - Location and market area
For online businesses, this isn’t such a big deal. For retail businesses, it’s all about location. Walk around the area yourself and survey the surrounding stores, the people, and your overall gut feeling about the place. - List of current employees and org chart
You must understand who is responsible for what and who reports to whom. Ask for the organisation chart and at least a brief summary of each people’s role / responsibilities. - Insurance
Is the business insured properly? If so, what type of insurance is covered and what do the premiums cover? Any recent claims? - Product returns
What is the percentage of returns? Per product/service? How do the return rates compare to industry averages? - Customer patterns
Is the business seasonal? Do certain segments of customers prefer certain products? How are they broken out? Any type of learned patterns will speed your learning process up.
The second stage is the search
- Finding prospective targets
- Business for sale listings
- Business contacts / friends / family
- Professional support
- Compare prospects against target criteria
- Refine target criteria based on prospects found (if needed)
- Undertake as much research on prospects as possible (website / Companies House / trade articles etc.)
- Rank prospects
- Request information on selected prospects (in ranked order)
- You will probably need to sign a confidentiality agreement at this stage
- Compare information produced against initial information obtained - identify any inconsistencies
- Objectively review all information against target criteria
- Discard any that don't meet your criteria
- Re-rank the remaining ones
The 3rd stage is: Talking to the sellers
- For those that you select
- Arrange an initial call with sellers and sound them out about the business and test them on the information given so far
- After your call evaluate how good the responses were and how you felt about the sellers
- Sleep on it - then re-review your thoughts again; it’s well worth keeping all these aspects documented so you can keep track
- For those that still meet the criteria and you were happy with the initial responses, arrange to meet-up
- This may initially be off-site, but normally you'd want to at least see where the business was and get a feel for what you thought of the operation
- Produce a list of all the questions you want to ask them ahead of the meeting
- Assess the sellers face to face, if they have advisers, try to target your discussions with the sellers direct
- Following the initial meetings do a full and detailed assessment of what you found / how you felt and measure against your target criteria
- Compare different businesses against each other
- Discard any no longer of interest
- Dependent on size /type of business you may want to arrange a second meeting (and try to have this on-site if you can)
- Rank the remaining ones and re-evaluate against your criteria and your funding options
- Run your own business model / financial projections and flex them for different risk scenarios / changes to the business
- From this determine what you think the business is worth to you
- For the top target (or more than one if relevant) decide what outline offer you're prepared to make
- The sellers asking price is not your determinant here, it is what you think the business is worth and almost more importantly, what you can afford to pay (and with what structure)
- Be aware of what the sellers want i.e. share sale / asset sale / 100% or partial sale / handover and transition arrangements etc.
- Get advice if you can - professional ideally or at least from people you can trust and who have some experience
- Make relevant non-binding offers and ask for exclusivity if agreed
When you talk to sellers make sure you’ve fully updated your criteria and you know which elements of them you’re satisfied with after reading through the seller’s information document and which elements you want further explanation of.
Try to be polite but clear in what you’re asking and looking for.
As business brokers, we at Anderson Shaw Corporate Finance Ltd, are always happy to advise business owners about any aspect of buying a business and the processes involved. If you are thinking of buying, now or in the future, please contact us for a confidential, no commitment conversation. We will be pleased to provide support at any stage from planning, through target setting and evaluation through to negotiating and finalising on a deal.