What are the steps to buying a business?
5 minutes read
Buying a business is a large and complex transaction. Trying to think about the process all at once can be overwhelming. To help understand the many steps involved in an acquisition, we’ve broken it down into four distinct phases and highlighted some of the key things to do at each point to set your acquisition up for success.
Phase 1: Preparation
Do your groundwork before you start looking for a business to buy.
Assemble a team of advisors
Anyone buying a business needs trusted legal and financial advisors to call on.
You may also want to involve experts in business valuation, information technology, human resources and marketing. Some of these may be people who already work in your business.
If you’re hiring external experts, establish clear terms about retainers and fees, conditions of success, confidentiality, and conflicts of interest.
Set clear objectives
Why do you want to buy a business? What do you hope it will help you accomplish in terms of your strategic goals? Answering these questions honestly will help you define an acquisition plan and narrow down the types of companies you want to consider acquiring.
Write an acquisition plan
An acquisition plan is a roadmap for you, your acquisition team and your external advisors. It should specify:
- Your target timeline and budget
- The roles and responsibilities of acquisition team members
- The key characteristics of the kind of company you want to buy
- The types of risks you’re prepared to accept
A clear plan will help you communicate your objectives to stakeholders and keep you from pursuing inappropriate opportunities.
Find a business to buy
Start searching for businesses that meet the criteria set out in your acquisition plan, which may include traits such as:
- A proven history of success
- A product or service that will complete your own offerings
- Room to grow in its market
- Access to suppliers
Tap your business network or other industry contacts as well as your advisors to identify potential candidates. You can also choose to work with a firm that specializes in mergers and acquisitions.
Phase 2: Initial and pre-sale negotiations
Do the right research to get the most out of your negotiations.
Begin to arrange financing
Meet with potential lenders and investors before approaching a business you think you may want to buy.
You’ll want to be clear about how much capital you can put toward the purchase, how much equity other investing partners will be able to contribute, and what kind of terms your bank can offer.
Involving your financial partners early will ensure they’re on board with your plan and allow you to benefit from their expertise in business acquisitions.
Research the business and meet with the seller
Plan for a series of meetings with the vendor.
Find out more about why they want to sell and do some preliminary, high-level research on the business’s operational and financial performance. The goal of these meetings is to collect the information you need to draft a letter of intent.
Draft and negotiate a letter of intent
A Letter of intent (LOI) or similar document provides a framework for negotiations and the ultimate purchase agreement.
It should include:
- A purchase price range (the final number will depend on the due diligence process described below)
- A commitment from the seller to provide all necessary records
- Terms for confidentiality and communication
- The duration of exclusivity of the negotiations (the period during which the seller agrees not to solicit or consider other offers for purchase without first speaking with the buyer)
Phase 3: Final negotiations
Make sure everything is in order before you sign on the dotted line.
Conduct a thorough due diligence process
The due diligence process will consist primarily of a legal and financial review, but there may be other areas you want to look into as well, such as commercial positioning or IT infrastructure. Make sure you hire qualified professionals to conduct the process, which will likely take a few months.
Negotiate the purchase price
The final purchase price will be based on a variety of factors, including the business’s earnings before interest, taxes, depreciation and amortization (EBITDA), a valuation assessment, the results of your due diligence process and more.
Your negotiations with the seller should result in a mutually agreeable price.
Because you started working on your financing options in Phase 2, at this point, it should be largely a matter of finalizing the details based on the agreed-upon purchase price and availability of any vendor financing.
Finalize the purchase agreement
The purchase agreement will include details on the scope of the transaction, the payment terms, and any indemnifications and warranties. If the seller will be staying on with the company for a transition period, the agreement may also include an employment agreement.
Phase 4: Post-merger integration
Plan for what comes next.
Integrate your businesses
The first months after the acquisition of a business are crucial for its successful integration. You will need an action-plan to avoid missing essential steps. Your plan will help you engage with employees at all levels, ensure you are clear about your vision for the future of the business and maintain open lines of communications with employees. See our checklist for more guidance on making your integration a success.