How to find the right business to buy
Want to buy a business but don't really know where to start, or how to spot a good deal? Finding the right business is often the trickiest step when buying a business.
Follow these tips to guide you step by step toward a successful transaction.
Start by determining your target
What are your goals in this acquisition? Are you starting a business? You need to determine which type of business and which industry you are drawn to.
- A franchise or an independent business?
- An underperforming business you'd like to turn around?
- Manufacturing, retail trade, distribution, consulting services?
- An online business?
- A local or international market?
- Buying a competitor?
Before looking for a business, you need a good idea of your target. Would you like to start your own business? Are you looking to grow with the acquisition? To widen your market, improve your margins, implement a new technology?
A clear business strategy will help you come up with a solid acquisition plan before beginning your search for a potential target.
Leverage your network
Finding a business for sale is no easy task. Leaders seeking to hand over the reins, whether to retire or take on other challenges, don't usually shout it from the rooftops. That's where your network of contacts can be a valuable asset.
Share your plan with people you trust: family, friends, former work or school colleagues, business relations, and so on. They could provide you with useful leads.
Talk to entrepreneurs who have already made an acquisition and learn from their experience. They will be able to guide you to the right resources.
Lawyers and accountants are often the first to know about a seller's intention to sell. Some firms have even developed brokerage services that can direct you to good business opportunities.
There's also business brokers who have a portfolio of businesses for sale, as well as many specialized websites. These are all resources to explore.
Make sure to practice due diligence. If the business is advertised publicly, ask yourself some questions. How long has it been for sale? Is its product or service still in demand?
This is also why it’s important to have support through the process. The size of the team depends on the size of the transaction, but the most important thing is to surround yourself with a team of professionals that you click with, such as an accountant, a lawyer, and a financier. They will help you avoid pitfalls.
Complete a preliminary evaluation
Once you've got a target in mind, the next step is learning more about the business to determine whether to proceed or pass.
- Is the purchase price within your budget (including integration and financing costs)?
- Does the company's staff have the skills you need? Is the company's brand strong and does it have a solid reputation? What's is its track record of success?
- Has it ever been the subject of complaints from consumers or employees? Searching the websites of regulators will provide you with more information.
- Is it in an industry susceptible to technological changes? In a highly competitive market? Does it have a history of innovation? Does it own intellectual property or technologies you're looking for?
- Does it have a solid management team in place? By going on LinkedIn, you can see whether they have been there long.
- Why is the business for sale? Is the seller looking to retire? Entrepreneurs who aren't already engaged in a sales process are more likely to change their minds before making a deal.
- Is its culture compatible with yours (management style, employee relations, customer base)? This criterion is sometimes overlooked, yet cultural incompatibilities often determine the success or failure of an acquisition.
Doing research prepares you for the next step: meeting the seller. Figure out what key questions you want to ask to move forward. The more you know, the better equipped you will be to make an informed decision.
Express your interest
It's time to express your interest with the entrepreneur to get more information on the business. A bilateral confidentiality and non-disclosure agreement will have to be signed to protect your exchanges.
There will be many things to discuss:
- the business's operational and financial performance
- the sale timeframe
- the details of the transition period
- the sale of shares or assets
- an overview of human resources (turnover rate, retirements, negotiation of the collective agreement, etc.)
- inventory status
- intellectual property
- tax and legal issues (taxes up to date, outstanding litigation)
This list is far from exhaustive. Only once you are fully informed can you decide whether to proceed. Next is the round of negotiations, generally longer than desired, followed by the due diligence stage.
Be sure to evaluate the financing involved in buying the business you're interested in. What percentage of the transaction is the selling company prepared to finance? What assets does it have to enable you to obtain a loan? Can you also call on mezzanine financing?
Be disciplined, stick to your criteria and be patient in your search. Companies often make the mistake of being over-enthusiastic when looking for acquisitions, especially in an overheated market. This can lead them to make a non-strategic acquisition.
Keep in mind that the process can be very costly. Along the way you will have to pay many professional fees, from writing letters of agreement to preparing financial forecasts. These could cost up to $20,000, or even more.
Do not rush into acquisitions and remember that it’s not uncommon for a party to back out at the last minute. When this happens, count it as gaining experience. The important thing is to never lose sight of your goal.
Find out more tips on buying a business by downloading our free guide for business owners: Buying a Business in Canada.