Preparation is the Key To Success In All Things, Including Business Acquisition

Achieving the desired goal takes preparation and organization.  There are four key elements to the business buying process.

Achieving the desired goal takes preparation and organization.  There are four key elements to the business buying process.

  1. Business identification
  2. Organized search process
  3. Collection of date
  4. Due diligence.

Business Plan

If you set out towards a destination without a map, you will get lost. Likewise, statistics show that without a business plan, the rate of success diminishes dramatically.

Items to include in your business plan.

  1. Financing- Acquisition time, a year of living expenses, acquisition-related costs (CAP, Attorney, etc.) down payment, working capital.
  2. Risk/Reward- analyze your risk to reward ratio. A buyer should assess how much he is willing to risk before he even begins the search. 
  3. Self-assessment-In evaluating a specific business, determine your skill sets. Self-assessment should include why business ownership is for you.
  4. Location-The organization phase should include an assessment of how far a buyer is willing to travel or commute and what geographic areas the buyer will not consider. Narrowing down the geographic parameters can facilitate the process.
  5. Timing-To include due diligence, industry projections, and is it the right time to buy?
  6. Ability to Act-Does the buyer have the means to act quickly when the right acquisition target becomes available?
  7. Confidentiality Agreement, Buyer Resume, and Profile- A business intermediary will qualify the buyer. Nondisclosure or confidentiality agreements are involved in almost all business transfers. A buyer profile, personal financial statements, financial  capability and liquidity
  8. What Type of Business Should I Buy?-Understanding your target Company: manufacturing, distribution, service or retail.
  9. Manufacturing-Manufacturing companies require a significant investment in capital assets: machinery, floor space, workforce, and capital needs such as cash for operations and capital for funding receivables and payables.
  10. Ideal Buyer Candidate: The ideal buyer is financially capable of funding with personal assets. Prior ownership experience in the manufacturing arena is a needed attribute.

PROS

  1. Market protection – proprietary product
  2. Loyal customer base for specific products with contracts
  3. Legitimate business operation
  4. Ability to expand

CONS

  1. Large capital investment for equipment
  2. Significant working capital levels and payroll expenses
  3. Large workforce requirement
  4. Significant plant / real estate implications
  5. Government regulation
  6. Distribution-In addition to inventory costs, the distribution also implies high accounts payable and receivable levels, drivers, and a sales team. Profitable distribution companies should be examined by buyers that have a keen feel for the capital requirements and the ability to sustain capital levels.

Ideal Buyer Candidate-The ideal buyer can fund or raise additional capital with personal assets and is well-connected in the industry being acquired.

PROS

  1. Ability to expand by increasing market penetration
  2. Having product lines with name recognition
  3. Highly collateralized business with significant inventory and accounts receivable levels

CONS

  1. Lack of market protection from manufacturer suppliers
  2. Large working capital requirements for funding significant inventory and accounts receivable levels
  3. Required distribution apparatus with rolling stock issues
  4. Government regulations
  5. Service-Service businesses are the safest investment for a first-time business buyer.

Ideal Buyer Candidate: The ideal buyer is a first-time business owner with average business skill sets; he can be a generalist with no technical skill sets needed.

PROS

  1. Many simple business formats requiring limited owner training
  2. Easier to staff
  3. Smaller fixed asset and working capital requirements

CONS

  1. Lack of market protection
  2. Competitors with similar services
  3. Unsophisticated workforce
  4. Possible licensing requirements
  5. Retail-Retail is the least sought-after business type. The negative view on retail businesses overlooks the relative ease in which retail establishments can be duplicated by setting up chain-type operations

Ideal Buyer Candidate: The ideal buyer is a first-time business owner with average business skill sets and people oriented.

PROS:

  1. Very little capital equipment investment necessary
  2. Leasehold improvements don’t need continued maintenance
  3. All-cash endeavor, no liquidity needed to fund accounts receivable
  4. Can reduce cost by landlord paying a portion of leasehold improvements

CONS:

  1. Limited clientele geography
  2. Continuous marketing and advertising usually required
  3. Extended hours of operation
  4. Large cash infusion necessary for initial inventory and continued inventory maintenance
  5. Difficulty finding and retaining workers

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