The Reality of Small Business Acquisition

If you’ve never done it before, buying a small business might sound easy. After all, there are tons of them out there and at any one time, a good percentage of owners are likely to be looking to retire or move on. You just save up or get a loan and away you go. And it can be relatively easy, if everything falls just right.

However, finding not just an existing business to buy but the right business for you, the one that fits with your budget, strategy, interests and goals, both business and personal, more often than not involves a bit of hard work.

Taking over an established business doesn’t just mean changing the name, there’s a bit more to it than that. And the existing staff are unlikely to line up and clap you through the door – in fact, some of them might leave. You might also lose contracts, favourable terms, customers, suppliers …

As with so many things, taking a practical, structured approach can boost your chances of success. So, what practical steps should you take? Let’s take a look.

Practical Steps to Get Started

Finding Opportunities

There’s a variety of ways you can find businesses for sale. Arguably the first step is to set out some criteria regarding what you are looking to buy. This might be to do with industry/sector, type of business, business size/turnover, market share, number of staff, geographical area, or some other requirements you identify. Getting clarity on this will help you in your search.

Next, think about where you can go to find appropriate businesses for sale. Options include:

• alerting your network and telling them you are looking for a new business to buy,
• posting on social media/LinkedIn, and checking business groups on those sites for opportunities,
• checking websites advertising businesses for sale,
• approaching a business broker.

At Dealmakers, we recommend that you write to owners of businesses that match your criteria and ask them if they are considering selling their business. A list broker will be able to supply names and addresses of matching businesses, and a mailing house can handle the practicalities of posting.

Once you have made contact with a prospective seller and qualified that they are a match for your requirements, meet them face-to-face and confirm you feel able to do a deal with them.

Progress to heads of terms (also known as a letter of intent or memorandum of understanding) as quickly as possible; remember, signing heads does not commit you to doing the deal.

Negotiation Strategies

This process will be conducted alongside due diligence, and the results of due diligence will have an impact on some of the things you negotiate and that end up in the sale and purchase agreement.

For example, it might be possible for the seller to effectively finance the deal. Agreement of a low (or no) initial consideration down payment, plus staged payments out of cash flow to cover the deferred, means the business pays for itself. The more motivated business owners are to sell, the better your chances of agreeing that.

Also, if the owner is insistent that things in the pipeline that they have done the spadework for will come through, and that the business will do better after acquisition as a result of that, you can propose an earn-out structure. That way, if they are correct and the business does do better as a result of the groundwork they put in, they get paid for that, and if it doesn’t, you aren’t out of pocket.

Should the seller stay on in some capacity after completion of the sale, then be clear as to what they are required to do, for how long, and for what reward. Having the previous owner available can be worthwhile – but it can also cause problems. Be fair, but be clear.

Due Diligence and Documentation

Undertaking thorough due diligence is crucial. This is the process of finding out what the business is actually like, which may differ in important ways from what the owner told you it was like. And the owner would not necessarily have been trying to deceive you. Small business owners will aim to present their businesses in a good light, and also might be unaware of some of the things the due diligence process will unearth.

DD will look at the financial health of the business over a period of time, the assets, including real estate and intellectual property, and liabilities, including loans, interest rates and tax returns due, financial statements, including balance sheet, cash flow statements and profit and loss statements, the legal standing, and any associated legal issues. It will also look at operational issues, and anything else that might be relevant to that particular business.

The outcome of the due diligence process will result in the creation of the sale and purchase agreement, and is also likely to mean the price and terms agreed in heads of terms are amended.

Any issues still causing concern should be covered by the addition of warranties and indemnities, so mitigating risks you are exposed to when buying your new company.

Financing Your Acquisition

Depending on the business and the circumstances, a variety of financing options from different types of lenders are likely to be available for the acquisition process. If there are assets, they could be sold or leveraged for borrowing from finance providers. A motivated seller could open the door to seller financing. Look at each option on its own merits – and be prepared to get creative about deal structure.

Dealmaker Danny Beaumont bought a £3m revenue manufacturing business with no money down. As the only interested party, and with the owners under time pressure, Danny was in a strong position. The deal was structured to pay for the property on day one. All the value in the business was deferred consideration.

A friend who invested in commercial properties agreed to buy the property and lease it back to the company. The sellers received the money from the property purchase, and Danny bought the business without investing any funds upfront.

Operational Considerations

You are buying a business, not a job, so make sure you don’t get landed with all the issues related to running the business. This is where your management team come into their own. Trust them to do their jobs.

When HR director Phil Hunt was faced with the possibility of losing his job, he knew he had to take action. His search to establish an income led him to the Dealmaker’s Academy, and when he heard a podcast where buying hair salon businesses was discussed, everything changed.

Despite not having any previous involvement in the industry, Phil recognised the potential. Before long he had acquired two salons and by not working in the businesses was free to pursue his goal of owning six or seven. When he gets to three, he intends to employ a managing director, so he remains free of the demands of the operational side of things.

Exit Strategy

Even before you buy a business, whether a start-up or an established company, it’s not too soon to be thinking about your exit strategy. It’s good entrepreneurship, and an area where your business and personal goals and objectives will guide you.

Shortly after Dealmaker Andy Doyle embarked on his digital media acquisitions journey, he set his exit objectives. His goal now is to have seven companies in his group, with a total turnover of about £7 million. He has appointed a managing director to help him achieve that goal.

Andy says: ‘In five years, the group has got to be in a position with enough stable income and profit that we can sell it. The minimum sale value would be £20 million. So, we need to achieve a profit between 15% and 20%, which is very achievable.’

A £20 million exit would mean a £15 million payday for Andy.

It’s prudent to position the business to be as attractive as possible, a process likely to start a year or more before you plan to sell. You want to be able to demonstrate a proven track record of profitability. Remember to factor in associated costs, and consider identifying target buyers, perhaps including staff buyouts or private equity. Importantly, make sure the business runs without you. If you are an essential element, the business will lose value.

Why Do Small Business Acquisitions Fail?

There are many reasons small business acquisitions can fail, including:

• Poor due diligence, which can lead to an incorrect valuation and so overpayment on the purchase price, and discovering things like an out-of-date customer base, hidden debt and insufficient working capital when it’s too late.
• Not including appropriate warranties and indemnities in the sale and purchase agreement, meaning protections aren’t in place.
• Buying shares instead of assets – a deal that could work for the acquiring company as an asset purchase might be a disaster if the shares are purchased. It might also work better if the target company is put into liquidation.
• Committing to repayments that cash flow struggles to support; you just need one bad month and it can all go south.
• Poor quality management team, either just not as good as they need to be or poor at communicating with stakeholders.
• Overextending resources, trying to do too much at once, leading to failure.

The key ways to mitigate things like this are to conduct thorough due diligence, then draft the sale and purchase agreement based on findings. It’s worth the hard work involved. It helps to have a strategic business plan for mergers and acquisitions, to make sure you buy assets or shares depending on what’s appropriate for that company, and to consider how you structure repayments. You also need a solid management team. And remember, communication in all things is hugely important.

Post-Acquisition: What Happens Next?

Once a small business acquisition has been completed, there are a number of tasks to undertake.

Information

You need to get the word out, and stop gossip from spreading, so hold a staff meeting. Try to tell everyone at the same time; if it’s a multi-site operation this will need a bit of thought and planning.

Make sure staff know who to contact with what query – and make sure it isn’t you! Let them know right away if there will be any job losses.

Have notes prepared covering all the main details and distribute those to all staff, or make them available via the staff intranet, to stop rumours from getting a foothold.

Consider whether any key customers or suppliers need to be personally informed.

You might also want to put out a press release to let the wider world know.

Access

You need to secure access to premises and systems, so do some basic checks.

Change the alarm code and change the locks. Give the new keyholder details to the police.

Check all passwords and logins work. Speak to the seller if you hit any issues. Change the passwords.

Cash

Check the business bank account balance and overdraft facility, and change the passwords.

Cancel all debit and credit cards and get the bank to issue new ones to you.

Cancel Direct Debits and standing orders you don’t recognise.

Utilities

Read the meters – take photographs.

Get Help with Business Acquisition

Business mergers and acquisitions can be exhilarating. They provide incredible opportunities for growth at a rate not possible via organic methods, and routes into new markets that might otherwise take time to establish. Handled correctly, they can be the key to wealth and success. However, they are also not without risk.

Having someone with years of experience in business mergers and acquisitions on your side can be a huge advantage. Jonathan Jay has helped more than 3,000 people buy successful businesses and become acquisition entrepreneurs, and he has put together the most comprehensive FREE package of business buying resources available today. To get started on your acquisitions journey, download your FREE Business Buying Toolkit now.