What are the steps to buying a business?

Phase 1: Preparation

“The first step in acquiring a business is to get into the right mindset about how long it will take,” says Brett Weese, a Senior Director with BDC’s Growth & Transition Capital, adding that it can take at least six months from the moment you decide to pursue an acquisition strategy to closing the deal.

Weese says that even before you start looking for a business to buy, it’s important to do some groundwork.

Assemble a team of advisors

Anyone buying a business needs trusted legal and financial advisors to call on.

You may also want to involve experts in business valuation, information technology, human resources and marketing. Some of these may be people who already work in your business.

If you’re hiring external experts, establish clear terms about retainers and fees, conditions of success, confidentiality, and conflicts of interest.

Set clear objectives

You can start by doing a deep dive with your management team into your business’s current standing.

• What are your strengths and weaknesses?
• What is the vision for the next few years?
• Why do you want to buy a business—what do you hope it will help you accomplish in terms of your strategic goals?
• How does this fit with your vision?

“Answering these questions honestly will help you define an acquisition plan and narrow down the types of companies you want to consider acquiring,” explains Weese.

A strategic planning exercise is a great way to conduct these discussions and validate options.

Write an acquisition plan

An acquisition plan is a roadmap for you, your acquisition team and your external advisors. It should specify the following:

• your target timeline and budget
• the roles and responsibilities of acquisition team members
• key characteristics of the kind of company you want to buy
• the types of risks you’re prepared to accept

“A clear acquisition plan will help you communicate your objectives to stakeholders and keep you from pursuing inappropriate opportunities,” says Weese.

Find a business to buy

Start searching for businesses that meet the criteria set out in your acquisition plan, which may include traits such as the following:

• a proven history of success
• a product or service that completes yours
• room to grow in its market
• access to suppliers

Tap your business network, industry contacts and advisors to help you identify potential candidates. You can also work with a firm specializing in mergers and acquisitions.

“One of the best approaches to making an acquisition is to speak to sellers directly,” says Weese. “You may even want to approach a competitor, although talking to them about buying their business can be a little touchy.”

Weese says it’s best to build a relationship and foster their trust first. When a possible sale becomes more realistic, signing non-disclosure agreements will encourage frank discussions. 

Phase 2: Initial and pre-sale negotiations

Understand your financing options

Meet with potential lenders and investors before approaching a business you may want to buy. Most bankers will be open to examining what kind of transaction is possible given your financial position. This will help you avoid negotiating a deal you cannot finance.

Most transactions include three sources of financing, including the following:

• internal or outside equity, including existing cash on balance sheet
• bank debt
• vendor financing

According to Pascal Dion, a Director with BDC’s Growth & Transition Capital, involving your financial partners early will ensure they’re on board with your plan and allow you to benefit from their expertise in business acquisitions.

“As you start negotiations, you’ll want to be clear about how much capital you can put toward the purchase, how much equity other investing partners will be able to contribute, and what kind of terms your bank can offer,” Dion says.

Research the business and meet with the seller

Before entering into negotiations with a potential target, you’ll want to research the company as much as possible. Although you’ll never know as much about the business as the seller does, you should try to close the information gap as much as possible before completing the transaction. 

Plan for a series of meetings with the vendor.

• Explain why you are interested in buying the business.
• Find out why they want to sell.
• Get an idea of their expectations regarding the sale price.
• Seek some basic information about the company—sales, gross margin, earnings before interest, taxes, depreciation and amortization (EBITDA)

The goal of these meetings is to collect the information you need to draft a letter of intent (LOI).

Draft and negotiate a letter of intent

Usually, both parties will want to sign the LOI or similar document before launching a formal due diligence on the business (more on this in the next section). 

The LOI provides a negotiation framework and should include the following:

• purchase price range (the final amount depends on the due diligence)
• commitment from the seller to provide all necessary records
• terms for confidentiality and communication
• duration of negotiation exclusivity (the period during which the seller agrees not to solicit or consider other offers for purchase without first speaking with the buyer)

You should involve your advisors at this stage, including your lawyer, accountant, transaction advisor and lender. Although not a binding offer, the LOI anchors the transaction terms to some degree.

Phase 3: Due diligence and final negotiations

The next step is due diligence and negotiating the purchase agreement. “The due diligence process is critical to the acquisition’s success,” says Weese. “Don’t cut corners to save costs or meet transaction timelines. And don’t dismiss negative due diligence findings or rationalize them away to maintain your optimism about the deal.” Make sure everything is in order before you sign on the dotted line.

Conduct a thorough due diligence process

It’s essential to get qualified professionals involved in studying the company. This will consist primarily of a legal and financial review and will likely take a few months.

You may also want to look into other areas of the business, such as the following:

• commercial positioning
• IT infrastructure
• balance sheet and historical and projected earnings
• the current owner’s importance to the business and their willingness to stay and help with the transition
• operations
• cultural fit with your company

Negotiate the purchase price

The final purchase price will be based on various factors, such as the following:

• the business’s EBITDA
• a valuation assessment
• the results of your due diligence process
• industry outlook
• customer concentration
• cash flow predictability
• reliance on current owner

Your negotiations with the seller should result in a mutually agreeable price.

Secure financing

Because you started working on your financing options in Phase 2, at this point, it should be largely a matter of finalizing the details based on the agreed-upon purchase price and availability of any vendor financing.

Finalize the purchase agreement

The last step to complete the transaction is to finalize the purchase agreement, which will include the following details:

• scope of the transaction
• payment terms
• any indemnifications and warranties
• an employment agreement, if the seller will remain for a transition period

Phase 4: Post-merger integration

Once you’ve closed the deal, it’s time to merge your businesses. “The first months after the acquisition are crucial to its success,” says Dion, adding that how you go about the integration can make or break your company. 

Integrate your businesses

You will need an integration plan to avoid missing essential steps. Your plan will help you engage and communicate with employees at all levels while ensuring you are focused on your vision for the future of the business. 

“Integration takes time and is not always smooth sailing,” says Dion. “Surprises are inevitable—you may need more money, time and/or people than expected.” He adds that building flexibility into your financing structure and preparing contingencies will help when the unexpected happens. 

Next step

To create an effective integration plan, download BDC’s free Post-merger integration checklist”