Chapter 3: Acquisition Process

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The process typically takes 6 months to 2 years of full time effort

Preparing for your search

  • Plan for the cost of the search, both financial and time, energy, and lost income
    • See chapter 4 and 5
  • Finding the right business to buy, i.e. identify and compare hundreds of prospects and dismiss in a prelim way and serious candidates get more attention and you'll know everything about them
    • financial performance
    • suppliers
    • workers
    • managers
    • customers
    • equipment
    • industry
    • competitors
  • Identifying prospects
    • finding aka sourcing is the first step
    • through business brokers (ch 8) or reaching out to owners directly (ch 9)
    • most searchers stay in close contact with 100 or more brokers while searching
    • working with owners directly can result in better deals since the company isn't on the open market but takes more time
  • Filtering prospects
    • see ch 10 and ch 11 to learn to use financial information to gauge enduring profitability
  • Making an offer
    • Speak with the owner, visit the company, reach out to other firms
    • prelim due diligence (ch 12) is iterative with learn, filter, ask more questions, learn...
  • Offer price and deal terms
    • most small businesses sell for between 3 to 5 times their EBITDA (ch 11)
    • usually send a first offer for the company with an indication of interest or IOI which is usually just a one page letter that isn't binding. This is just to agree on a price or range of prices before figuring out terms and conditions (ch 14)
  • Letter of intent
    • decide on other terms like amount of seller financing
    • buyer and seller usually negotiate the specific price and terms which begins with a formal letter called the letter of intent or LOI (ch 15 and 16)
    • most LOIs are not accepted by the seller
  • Completing the acquisition
    • once you get a signed LOI from the seller continue to keep researching finances and operations of the business aka confirmatory due diligence which is the most time consuming part of the search where you spend even more time at the company and gain access to employees, suppliers, and hopefully customers
    • meet with lenders and equity investors to raise funds
    • hire an attorney to prepare formal acquisition documents and watch for hidden liabilities
    • hire an accountant to review financials and prepare a quality-of-earnings report to make sure the business has been paying its bills and taxes and will continue to be profitable
    • close and become CEO

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  • 5 months ago by vince