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What to Look for in a Business Acquisition

At a recent breakfast seminar, one of the panelists explained how successfully buying and selling businesses can be addictive. His buy-build-sell track record had secured market leadership in three different industries, and led to the successful launch of his own private equity group.

Business acquisitions are well known for their roles in company growth and market consolidation, as well as providing paths to more independent lifestyles for well-capitalized entrepreneurs. Yet despite the opportunities acquisitions can create, the market is littered with deal casualties.  Often times failed deals are the result of a lack of key information on the buyer’s part. Working with a trusted advisor to answer questions like those below will help arm you with the necessary knowledge to find and complete a transaction that will meet your goals:

About the Seller
Learning as much as possible about the seller’s motivation for exiting will provide important insight into the acquisition target. Questions to ask include:

  • How was the business started?
  • Why is the business for sale?
  • Is the seller selling the entire entity or just the assets?
  • Is there a business plan in place?
  • What keeps the seller up at night?
  • If the seller is involved in the business: How much salary does the seller take?  How much vacation?

About the Market
A few questions concerning the market that due diligence will help answer:

  • What is the size of the market and what market share does the acquisition target hold?
  • To what level can the business be grown?
  • What are the biggest challenges to growth?
  • Who are the industry leaders? Is the company considered a market leader?
  • Does the product or service have a life cycle, or seasonality?
  • What would your customers and competitors say this business does best?

About the Numbers
It is important to thoroughly understand the financials of any potential acquisition. To determine if the seller’s claims are supported by the figures, ask to review at least three years of:

  • Sales by customer
  • Revenues
  • Gross margin
  • Lease details
  • Earnings before interest, taxes, depreciation and amortization (“EBITDA”)
  • Capital investments
  • Accounts receivables
  • Accounts payable
  • Inventory

About Legal Issues
To avoid hidden surprises after purchasing a business, it is important to delve into any legal issues surrounding the company. Questions to ask include:

  • Are contracts, agreements, copyrights and trademarks current?
  • Are products patented, if necessary?
  • What is the current status of any litigation?
  • Are there any possible law suits on the horizon?
  • If the business location is leased, what are the terms of the lease?
  • Is there proof all taxes have been paid?

About the Environment
Current governmental guidelines can levy responsibility regarding environmental issues that existed prior to the current ownership. Find out how hazard waste is disposed of and if there are other environment considerations that must be taken into consideration.

About the People
If purchasing more than just the physical assets of a company, a potential buyer should understand key personnel issues such as:

  • What employment agreements are in force?
  • Are any family members on the payroll?
  • Who are the key people, what do they do and why?
  • Which key employees are most likely to leave if there is a sale, and why?
  • How well documented are the business processes?

Taking time to ask the right questions and perform detailed due diligence before buying a business removes emotion from the transaction and helps avoid potential problems down the road.