9 Steps To Buying A Business
At first, you may think buying a business is a long and complex process. After all, it involves finding the right business, convincing the business owner of your credentials, and negotiating a deal.
And once you’ve navigated that potential minefield, you’ve then got to deal with accountants, lawyers and sometimes financiers and other professionals.
No wonder it can seem a daunting prospect with many people unsure of where to start.
However, we believe in breaking things down into bite-size chunks and logical steps. Then all you have to do is focus on and work through each of the steps. Doing so will bring you to a logical conclusion – and a successful acquisition.
And so here are our nine steps to buying a business:
Particularly when you’re first starting out, it’s advisable to choose a specific sector or sectors – preferably ones you’re familiar with.
This is for several reasons…
Firstly, it helps you focus, rather than be overwhelmed by too many options. It’s easy to be indecisive when you’re not sure where to focus your efforts, and this will cost you valuable time. You’ll find yourself procrastinating – and you’re only at step one.
Not exactly the start you want to make on your dealerpreneur journey, right?
Focusing on specific sectors also mean you’ll be familiar with the industry. You’ll understand the terminology, the market, the key players – all of which will help when talking to business owners.
This will enhance your reputation, your positioning, and also your confidence. You’ll be able to walk into meetings as one of the go-to guys in the M&A world in that particular sector.
Another advantage of concentrating on an industry you know is your connections. Ex-colleagues, associates, and other professional connections that may be able to provide you with leads. This is extremely valuable.
And so, having chosen your sector, you can progress to step two.
Now that you’re clear on your target market, it’s now time to start targeting specific businesses.
And once again, it’s always a good idea to create some clear parameters with which to work in. But what does this mean?
Well, do you want to target businesses all across the country? Or within a 100-mile radius? Further afield?
What about the size of the business? Are you confident in your ability to go for those with 30+ staff and over £5 million in turnover? Or to get started, do you feel it’s more realistic to look for businesses with between 10 and 20 staff and turnover of £1 to £2 million?
Does your strategy include using business brokers? Or would you prefer to focus on businesses that aren’t advertised for sale?
Top tip: our preference is the latter – even when you’re just getting started.
And much like deciding on the industry to target, you should give this some thought – but also be decisive! Don’t spend days laboring over this – make your choice and go for it.
Tempting as it is to go all-guns-blazing and just contact anyone and everyone that vaguely meets your initial selection criteria, you should resist.
Whilst research may not appear to be one of the sexier activities a dealerpreneur has to do, it is essential. Many a deal has fallen over or caused considerable problems because of a lack of research.
This doesn’t mean spending hours on end scrutinizing every facet of each business. But it does entail undertaking some smart research and looking for obvious red flags.
You can do this online by checking out their website. Get a feel for how professional you feel they are. What’s their personality like? Is it a fit for you?
Check out their accounts. How healthy are their financials? Is there a growth trend, or are their sales declining year on year? How much debt do they have?
Give them a call. Speak to some of their staff and see how they deal with enquiries and potential customers. Are they courteous and professional? Are they asking the right questions?
You may also want to pay them a visit. What does their premises or office look like from the outside? Is it visually appealing, inviting, and clean? Or is the building dilapidated and the external appearance off-putting?
By this stage of the process, you will have built up a much more detailed picture of your target businesses. You’ll have eliminated many who don’t fit your criteria, but you’ll also be left with a list of those that do.
And now it’s time to reach out to them.
There are different ways you can do this. One method that works very effectively is good old direct mail. You simply send a letter to them – make it nice and personal, not at all pushy, and talk about THEM, as well as you.
You should also make it clear (and once again, not pushy) what you want them to do next. It’s likely to be along the lines of “email or call me for more information.”
If you don’t hear from them after a couple of weeks, follow up with them. You might choose to call them, email them, or send another letter. There’s no right or wrong means of communication – but the key is to do it.
You have no idea how many people give up at the first letter and never follow up. But there could be any number of reasons why they didn’t reply. Perhaps they put it to one side, with the intention of calling you, but forgot about it.
We’re all busy people, and all do that, right?
The letter may not have arrived. Mail does get lost sometimes. Maybe they’re still thinking about it, and a second communication is enough to convince them they should speak to you.
And the list goes on.
But be sure to systemize this, so that you know exactly who you sent a letter to and when. And then when you followed up. And who’s interested and who isn’t.
Because once that phone rings, it’s time for step five.
And so, the phone rings, and it’s someone responding to one of your letters.
“Bloody hell, this works!” you’re thinking to yourself.
Indeed it does, when it does, following some of the strategies in step five is all-important.
The first point of contact with a potential seller should ALWAYS be on the phone. Don’t get over-excited and want to leap into your car that very second and drive to their offices.
That approach is wrong on a number of levels.
You need to remain calm, be in charge of the situation, and let the proven strategies do their thing.
The first rule of thumb: ALWAYS call them to conduct the call. They will, of course, call you in response to a communication from you. When they do, and should you answer the phone, be polite but explain that you’re about to enter a meeting.
Then you agree to call them back at a mutually convenient time.
This ensures: A) You’re in control of the process, and B) You can prepare for the call, by getting their details out and familiarizing yourself with them.
And then when you call them back, you want to ask them some specific questions that uncover the information you’re looking for. Asking open questions is a good idea here, and one of the first questions may be why did they respond to your letter?
The answer to this question may lead the conversation, or you may have to probe away with other questions. But at the end of the call, which should ideally last from around 15 to 30 minutes, you want to be happy that you’ve collated at the information you need.
If you are, and it ticks many of the boxes you want it to, then you may want to meet them face to face.
Preparation for this step is absolutely critical.
On the phone, you can be reading from a script or doing other things that your counterpart won’t be aware of because they can’t see you. But face to face, it’s way different.
Therefore, you need to ensure you’re fully prepared with how you’re going to open the meeting. You should also know the types of questions you want to include throughout the meeting. And finally, be clear on how you’d like to end the meeting.
Ideally, you want to be talking no more than 30 percent of the time. If you’re asking the right types of questions and have built up plenty of rapport, your counterpart will talk until their heart’s content.
Remember, people love to talk about themselves.
And this is often where many dealerpreneurs can stumble because they don’t listen enough. They want to do most of the talking, figuring this means they are controlling the meeting.
Take this approach, and you’ll put many potential sellers off. You need to make them feel at ease, that you’re listening to them and that you genuinely want to help them.
By the conclusion of the meeting, you should have a pretty good idea as to whether you want to proceed. You should also have a good idea as to what your counterpart feels about you.
And if you’ve prepared and executed correctly to this point, you’re ready for step seven.
Heads is short for Head of Terms, and they are a significant step in the overall process.
They set out the terms of the transaction that you want to agree with your counterpart. At this stage, it’s essentially an agreement in principle.
And although not legally binding, Heads of Terms essentially condenses the key elements of the sale into one document. This would include responsibilities, payment, and periods of confidentiality.
They also have another important purpose – they provide focus and help eliminate confusion for both parties.
You’ll be surprised at how often two parties leave a meeting or negotiation with two quite different views as to what was agreed. Having the essentials down in writing can mean any potential misunderstandings regarding the transaction are spotted (and resolved) before time and money is spent drafting detailed contracts.
And at the end of the day, we’re all human. Genuinely forgetting or overlooking what you agreed in a meeting a month ago is a real possibility. And so, your Heads of Terms acts like an aide memoir.
They also act as instructions. When it comes to drafting contracts, the lawyer is just setting out, in legally binding words, what you have agreed. And whilst a contract is likely to contain lots of legal jargon and terms, its main goal is to reflect what has already been agreed.
Due diligence, in simple terms, is an investigation into the business you’re interested in buying.
Due diligence takes place after Heads of Terms have been agreed, but before the transaction has been finalized. One of the objectives of due diligence is to verify whether the acquisition is what you thought it was.
During the due diligence process, many key areas of the business will be looking at in great depth. These include the company’s accounts, customer contracts, and any potential legal and past issues. Historical records will be scrutinized and thoroughly looked at.
The entire process can be a long, complicated process, depending on the size and state of the business. Ultimately you want to ensure everything checks out, and that the business doesn’t have any skeletons hidden in its closet.
You must ensure you appoint an accountant and lawyer who both have experience in this area.
You may choose to be involved and look over some of the documents yourself; however, it’s also advisable to have professionals on your side. They will know exactly how to look for and identify possible red flags that you may overlook.
At the start of the due diligence process, you would normally sign a confidentiality or non-disclosure agreement with the other business owner. As well as ensuring confidentiality on both sides, it also prevents others from prematurely finding out about a potential sale before the transaction has been completed.
And so, what are the risks of skipping due diligence?
Well, you could end up buying a business on false pretenses. The seller may have left out key details (not always deliberately) or fudge numbers in an attempt to make the business look more profitable.
Without verifying all of the details you receive and searching for more information, you don’t have the complete picture. And you might end up buying a business that isn’t the shrewd investment you thought it was.
SPA stands for the sales and purchase agreement. This is a legally binding contract that obligates a buyer and seller to complete a successful transaction.
An SPA provides both parties with a framework for how the transaction should proceed. It also details what is included in the transaction and, if or where necessary, what is excluded from the sale.
This type of contract would normally be drawn up by a lawyer. Furthermore, it allows the buyer and seller to ultimately agree upon an appropriate price and payment terms for the business.
The SPA may include restrictive covenants. These can be used by the buyer to prevent the seller of the business from establishing a new business in the same sector – essentially a competitor – for a predetermined period of months or years.
Such restrictive covenants must be reasonable in terms of geography, scope, and duration.
Another area that your SPA may focus on is warranties and indemnities.
Warranties are essentially statements of facts made by the vendor of the business, relating to the state of the business. If a warranty is proven to be untrue – and subsequently, the value of the company is reduced – the buyer may have a claim for breach of warranty.
In an SPA, warranties will cover all areas of the business, including assets, accounts, contracts, staff, property, and intellectual property, to name just a few.
Payment and Completion
And so, the final documents have been completed. Contracts have been signed. And the payment agreement has been put in place. You’re now the proud owner of a new business!
It’s a process that has a lot of moving parts. But by breaking it down in the nine steps above, it suddenly looks and feels a lot more manageable.
Now over to you:
Have you previously purchased a business? How did you find the entire process? Were there any hiccups?
Let us know and leave any questions in the comments below. I’ll be sure to answer them as soon as they come in!