11 Lessons Learned From The Business Acquisition Process
In many ways, buying a business is like riding a roller coaster.
There are highs and lows, and some unexpected stomach-turning twists along the way. Is it a process that I’m excited to repeat? Maybe someday. But for now, I’m happy to shift focus on the growing aspect of owning a business — it’s the part that appeals to me most.
Given the fact that my partner and I have recently procured not just one, but three businesses — all in a three-month timespan — I’d like to share some things that I’ve learned firsthand that can help you if you’re thinking about buying at some point.
Sellers, you can benefit from this list too. Read on to see what you can do to make your business more attractive to any serious buyer.
Understand How Valuation Is Calculated
It’s important to note that there is no set standard when it comes to how valuation is calculated. Companies with extensive history will usually go with a multiple of EBITA (earnings before interest, taxes and amortization). High-growth companies or companies that don’t have a long history will usually use a multiple of total sales or just take the previous three to six months and project sales forward. In a hot market, you will often see wildly different calculations, so it is important to understand how they are calculating the price and have a formula that you are comfortable with.
Be Aware Of Generous Add-Backs
Many companies share resources, such as office space or a team. But with M&A, be aware that these expenses are often claimed in full as an add-back with the entire expense being added back into the business’ profits.
Do An Inventory Audit
When selling your company, you may want to consider getting inventory on consignment. This means that the supplier retains ownership until it is sold, helping to remove inventory-carrying costs from the equation.
Buyers: Do a full inventory audit and understand what you are buying. Often during a business acquisition, you will end up acquiring dead or slow-moving inventory. It’s important to understand how much of your inventory is fast-moving so that you can keep cash flowing. Be prepared to liquidate or write off slow-moving inventory to pull cash out for other products.
Arrange To Have Payment Terms Revert With Your Vendors
For sellers, plan to have the payment terms change with your vendors after the sale goes through. In most cases, this means going back to cash reserves.
Distinct and clear branding is essential for differentiating your company from the competition. In order to stand out, you’ll need a clear and distinct image, so sellers: Make sure you have all your brand assets in one place, with a clear value assigned to them.
Get A Trademark And Patent Lawyer
Speaking of branding, a good trademark and patent lawyer is worth every penny in my experience. Before you sell or purchase a business, make sure you know exactly what names and trademarks are on the table.
One of the businesses that we were acquiring had a trademark filed, but it was discovered that another company had a similar trademark that had been filed at almost the same exact time. To avoid any issues down the road, we reached out to the other company and were able to come to an agreement that we wouldn’t be infringing on each other’s trademarks.
Have A Plan For The Transition Period
Unless this is a business that you are very familiar with, there will inevitably be a learning curve involved with learning how they operate, who their vendors are, and the day-to-day business operations. If there are employees, you will need time to get to know them, understand their strengths and weaknesses and assess who you want to keep on your team. Whenever possible, it’s always a good idea to get the seller to stay on for a period of time to help make the transition as smooth as possible.
Know What You’re Purchasing
Acquisitions can be structured as an asset purchase or a stock purchase. In a stock purchase, you assume the business history, which includes contracts and pricing, but you face the risk of assuming any undesirable past history or undiscovered problems. In an asset purchase, you are only buying the assets and are not liable for any problems that may surface after the sale. The downside is that you are essentially a brand new company in the eyes of vendors and banks and will need to build up your standing.
Perform An SEO Audit
While less crucial for brick-and-mortar shops, an SEO audit is vital for web-based businesses. An SEO audit involves checking how the website ranks from an SEO perspective to discover what could be improved.
Make Sure You Have Cash Reserves
Buyers: Do you have enough cash on top of the purchase price? Reserves are crucial in any business, and depending on what industry you’re in, the amount will vary considerably. For a web-based business, these will be much lower as you’ll have less overhead, but for a manufacturing or distribution sector, reserves should amount to roughly two months’ revenue.
Don’t Forget Your Passwords
Finally, buyers, don’t forget to request a list of key contacts and logins to be supplied at closing. It’s a small detail but it will save you a great deal of hassle.
One final piece of advice, if you’re new to the game or not sure what you’re getting into, enlist the help of a good M&A attorney. Likewise, when it comes to selling, an attorney or financial advisor who’s experienced in M&A can help you to ensure that you’re in a strong position to sell and that you’re not leaving money on the table.