For many small business owners, one of the smartest growth strategies is through the acquisition of another business. Acquiring an additional business can offer increased capabilities, such as new niche products or technologies, a larger market share, cost cutting, and many other advantages.
Overall, a successful acquisition should improve a company's synergistic performance. In other words, when a company combines its value and performance with another company's respectively, the result should be greater than the sum of the two separate companies. Once the synergies are realized, the result should be greater financial results.
With today's stronger economy, there's no better time to buy a business - for both existing business owners and first time buyers. According to BizBuySell, many Baby Boomers are entering retirement and exiting their businesses, resulting in a strong inventory of businesses for sale with healthy financials. Furthermore, small business financing is easier to obtain than years past and interest rates are still low.
Here are 6 key steps small business owners can take to benefit from the positive small business environment and ensure a successful business acquisition.
Define your acquisition strategy. To avoid getting overwhelmed in your search for the right business, it's important to have an acquisition strategy. Begin by asking yourself a few critical questions:
- What are my business goals? Do I want to diversify? Do I want to expand nationally?
- What are the growth opportunities for my company? Are there untapped markets?
- What are my acquisition needs? Do I need to cut labor costs? Do I need to modernize?
- How much money am I willing to spend on the acquisition? How much can I finance?
- What sort of business should I focus on? Should it offer a specific product or technology?
- Where should the business be located? What are my geographic parameters?
Develop a search strategy. There are several ways to search for an existing business to acquire. Online marketplaces, such as BizBuySell.com or BizQuest.com, are a great way to view thousands of existing businesses for sale, as well as connect directly with business owners looking for buyers. They're also a great way to research the market and get a good understanding of business categories and asking prices. Working with a professional business broker is another invaluable resource. Not only can they assist you in your search, but also the entire buying process, allowing you more time to focus on running your current business. You can also network with friends and professional colleagues, or even approach business owners directly and ask them if they're interested in selling.
Determine if the business is a good fit. Once you've selected a business to acquire, this is where you evaluate if it not only matches with your acquisition strategy, but also improves your company's overall synergistic performance. Your new addition should bring additional value to your company, such as offering you additional retail stores in key geographic locations that allow you to penetrate key markets. Or, it may add value through offering a new manufacturing facility that can produce new products at a lower labor cost.
Determine if the asking price is reasonable. The business you have your heart set on may appear like a winner on the surface, but it's important to conduct a thorough due diligence and confirm if it's really worth the price they're asking. A reputable business should be able to produce financials going back at least 3 years, including its tax returns, profit and loss statements, cash flow statements, and current balance sheets. Ask the owner how the price was determined. Next, make a thorough assessment of all the businesses assets, including its inventory, equipment, existing leases, contracts and employees and then have the business inspected by a professional appraiser to determine its fair market value.
Examine the company's debts, liabilities and legal status. Ask the owner if the company has any outstanding debts, as well as any other obligations, such as ongoing litigation. Find out if the owner has the full legal authority to sell the business, or if you need full approval from a business partnership. Ask to review all leases and legal permits. If the business property is leased, ask to review the terms of the lease to determine if it can be transferred over to a new owner.
Capital requirements and financing. The amount of capital you are able to invest will have an impact on the type of business you are able to acquire. It's a good idea to plan ahead and have your company's financials prepared ahead of time and see what type of funding you can receive from lenders. There are a wide range of funding options available these days, including SBA government backed loans, traditional bank loans, lines of credit, cash advances, and loans from alternative lenders. Plus, many business owners are willing to offer seller financing in order to close the deal, giving you leeway to negotiate the right down payment, length of the loan, monthly payment and interest rate.
As a small business owner, acquiring a second business can offer a path to growth and additional revenue. Developing a clear strategy and conducting a thorough due diligence can streamline the process and increase the odds that your acquisition is successful.