This blog post was written by Leonard Holler, Wyoming Entrepreneur SBDC regional director.
Some statistics say that nearly two-thirds of purchased businesses fail. Here are some strategies that might assist you in making your business acquisition more successful.
1) Have a plan for acquiring the business. I mean - understand why you want to buy a particular business so that your plans will guide your decisions during the process, you can better communicate with employees and vendors, as well as measure your progress. There should be a solid strategic reason for your purchase. Like - their strength or position in the market, protected intellectual property, growth potential of the market, economies of scale, the lifecycle of the business.
2) Develop criteria for your selection of a target business or company. Once you have developed the criteria, you can enlist others to look for viable candidates. You should include revenue and cash flow parameters (size of business), preferred industry sector, location, and investment preference. Then seek out your preferred targets at different venues – trade shows, industry association meetings, searchable databases or with your contacts in the industry.
3) With your plan in place and your search criteria identified, you need to take a good close look at yourself and your team to assess the talent within your own organization. You will need their leadership to assist in the negotiation, integration, and management of the new acquisition. Outside professionals should be considered, such as, your accountant, attorney, insurance broker, banker, and valuation specialist to assist with advising you in this decision. They will help make up part of an acquisition team, besides you and your key staff.
4) After you have identified a target company by gathering sufficient information and evaluating it among other possible candidates, you need to determine that they are willing to sell. If they are, show them that you have an interest in the form of a non-binding offer. Once the offer has been accepted, complete some due diligence on the company to verify the information they provided, in order to make your offer, and then evaluate your return potential. This would include developing projections based your research of the industry and local market. Additional inquiries should be made regarding legal issues involving intellectual property, contracts, agreements, leases, employee status, and anything else that might impact the performance of the new acquisition.
5) If you are satisfied with the due diligence, a binding Letter of Intent to purchase the company should be made with some funds changing hands. Once its accepted, a purchase agreement will be drawn up which includes issues, both large and small, that have been negotiated along the way. Negotiation of the purchase agreement is like a balancing act between you and the target company. Even though each deal is different and following these points is no predictor of success, your chances of a successful business acquisition can be enhanced by considering them.