A comprehensive guide to buying a business

Opinions expressed by entrepreneur Contributors are their own.

One of my first jobs in the American corporations, and a remote one at that, was for a fairly obscure, unknown to the average American, but nonetheless very large and complex software conglomerate called Trilogy Software. For over a year I worked in an agile mergers and acquisitions (M&A) team responsible for due diligence support, data warehousing management for all pre-acquisition due diligence materials, restructuring and Finally, internal playbooks were responsible for operationalizing acquisitions in fully remote organizations. I was involved in almost 10 acquisitions over the course of a year and a half. After working in M&A, I knew early on that I wanted to be involved in some way in acquiring companies later in my career. I’m getting closer to that goal as I write this article!

In one of my previously published articles, I talked about all the reasons why you should buy a business instead of starting one. There are a number of compelling reasons to do this:

  • Existing businesses tend to produce cash flow.

  • You acquire a proven business model (product/service or both).

  • You may be able to purchase at a discount.

  • A customer base is already installed.

The fact that you are reading this article is a pretty strong indicator that you have most likely decided to take the next step in your business acquisition journey. Before we get too far into things, it’s important to understand that not all businesses for sale are created equal. Each individual company will require an individual approach to provide an analysis of its operations, financial health, growth prospects, etc.

I will guide you through the things you need to hypothetically buy a business using my personal and professional experience and knowledge.

Related: Why start a business when you can buy one? Here’s what you need to know.

Where can you find businesses for sale?

Of course, once you’ve committed to considering a business purchase, the next logical question is: Where can you find businesses for sale? Here are a few different ideas on where to start your search journey:

  • online marketplaces: Sites like BizBuySell, BusinessesForSale, and Flippa list thousands of businesses for sale across multiple industries.
  • estate agents: Business brokers specialize in matching buyers and sellers of businesses. They can be a great resource for finding companies that meet your specific criteria.

  • Classifieds: Online classifieds and online newspapers are often overlooked but can be a gold mine of opportunities. A little research can go a long way.

  • Direct from the business owner: There are business owners who are retiring and others who are looking to exit their current business. In my opinion, these offer the best options.

  • your existing network: Look for opportunities within your existing network, friends and family. They may be able to refer you to companies that might be a good fit for you.

Make sure you create and document a pipeline of leads for businesses for sale, paying particular attention to those that aren’t already listed anywhere online. Those will be the golden opportunities you really want to take advantage of. Your deal flow becomes important when you decide to make multiple acquisitions – when you want to build and expand a portfolio of companies.

How I would go about analyzing the deal

The first thing I say to anyone looking to buy a business is that they must have a lawyer and accountant available to help them with all the legal and financial requirements during the analysis, due diligence and valuation steps. Even the most seasoned entrepreneurs and business owners have them on standby to help when needed. If you’re considering buying a business, you should analyze some key information to make sure the business is a good fit for you.

The Profit and Loss Account

First, you should review the income statement (P&L) and income statement to get an idea of ​​the company’s financial health. Some of the more relevant income statement questions are:

  • If P&L told a whole story, what would it tell?

  • Will marketing dollars invested in the business actually make it grow?

  • How is the P&L different over 12, 24, 36+ months?

  • Is the company profitable today?

  • If we analyze the sales trends, do they reflect a healthy or an unhealthy business?

I usually have a business owner (if possible) release all relevant documents affecting the business electronically in a private archive so I can analyze everything thoroughly over an agreed period of time. Due diligence is never dry as every deal and every business opportunity is unique.

See also: 6 Important Considerations Before Buying a Business

Analysis of business processes

Of the number of companies I have been involved with in the acquisition process, the analysis of the business once you understand the financial condition of the company is second to none.

In my experience, acquiring a company is not necessarily something for the faint of heart or the inexperienced. You need to understand some key components of a company’s operations when analyzing it. Again, this is Business 101 at a high level because each niche or industry will have specifics related to it. Here’s what you’ll do for your potential purchase of the core processes that run the business. We call these five steps a Business Process Analysis (BPA):

  1. Identify a process to analyze that exists today.

  2. Check the dates of the process in place today.

  3. Plan the process.

  4. Analyze the process.

  5. Develop a plan of “what this process will become” (if you spot any gaps/problems).

The reason you should look at the core processes through this particular lens is that you identify flaws within the company that could provide opportunities that await you as a new owner. These gains include operational cost reductions, automation prospects, and even delays or process bottlenecks.

How to value the company

At the end of the analysis, and probably most important, you determine what you think the company’s valuation is. However, this does not mean that you take the asking price for that particular company at face value. There are different valuation models that need to be considered – like market value method, asset based method, ROI based method, discounted cash flow method (DCF) and some others. I will not go into the details of each as they are rather technical and really specific to various situations where your legal and financial advisers can best guide you. But some of the questions you need to uncover in the context of the assessment are:

  • What is the current market value of the company (if sold today)?

  • What is the growth potential?

  • Does the deal include intellectual property?

  • Is the business/model protected (trade secrets, technology, etc.)?

After you have had the opportunity to go through all the documentation provided, it is important to conduct a thorough analysis of the entire deal itself, including the assessment you have prepared. Here’s what you’ll be asking yourself, your attorney, and ideally a CPA:

  • What should the proposed terms of the deal be?

  • What are the risks and benefits of the deal?

  • What are the current and future market/industry trends?

  • How does this acquisition fit into your overall personal investment strategy?

By taking the time to answer all of these questions, you can make a much more informed decision about whether or not buying that particular company makes sense. When you are confident in everything you have come up with, the final step is to take your offer to the business owner, negotiate and either close the deal or walk out!

See also: 5 things you need to know about acquiring a business

Pay for the deal

The way you acquire your new business or company is also unique. There are almost infinite combinations that can be used to potentially fund the business. I won’t go into the specifics of each type as I am publishing another article on business finance – both traditional and creative. But here are some ways you can buy a business:

  • Friends and family (liquid cash)

  • Personal savings (liquid cash)

  • Traditional bank financing (loans)

  • Seller Financing/Creative (Seller Owned Credit/Promissory Note)

  • private financing

*This guide is not intended as financial or legal advice. Be sure to seek competent legal and financial advice from a lawyer and/or accountant.*


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