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Best Practices for Acquiring a Company
Published on Aug 27, 2013
Read our article, 'Best Practices for Acquiring a Company' at 'Time to Start Up,' the small business blog by BizFilings.
Acquiring a company isn’t the same as building a business from scratch. While the opportunity may be less risky in some aspects, you must do some investigating to ensure that you are fully aware of the terms of the purchase. Before diving in, it’s important to consider multiple angles.
First, buyers should carefully review their rationale behind the purchase. Asking a few questions prior to signing on the dotted line is imperative: What is your industry knowledge, and more specifically, your background on the targeted incorporation? Will acquiring a company open the door for potential customers? How well documented are the procedures of the business? What are current customers saying about the business?
After answering key preliminary questions, a next step might be to conduct a SWOT (strengths, weaknesses, opportunities and threats) analysis of the business. An example of a business’s strength might be strong research and development capabilities. An example of a company’s weakness could be a skills shortage amongst employees. An opportunity might be an underutilized expertise that could translate to the acquiring company’s customer base. A threat, meanwhile, might be an unusually well-funded competitor.
Assessing the corporation’s industry reputation and relationships is another important step. To do this, start a conversation with existing customers, suppliers, and vendors about the business. Additionally, contacting the Better Business Bureau, industry associations and licensing and credit-reporting agencies to make sure no complaints have been lodged against the business is smart.
At this point, buyers should consider forming an acquisition team. This team would include an accountant, an attorney and an intermediary. These advisors are critical when it comes to executing due diligence.
The acquisition team examines several documents, including:
A profit and loss statement for the past two years; and a balance sheet to identify assets and liabilities
A list of plant, equipment, fixtures and fittings, which the owner intends to sell; and a current valuation
A copy of the lease agreement, if the company’s offices are leased
Following a positive examination of these documents, the final step of acquiring a company is the negotiation process. A business broker can be useful in determining a fair market price for the business, taking into account the business's financial health, its earnings history, its growth potential, as well as its intangible assets.
Acquiring a business is a challenging task. While this list of preliminary steps is not comprehensive, it can help dictate whether you are ready to purchase and operate a business. Not being fully prepared prior to entering into an agreement could be the difference between a successful transaction and the failure of a business venture!