Acquisitions for Start-Ups: A Checklist for Buying Businesses
March 14, 2019
Acquisitions for Start-Ups: A Checklist for Buying Businesses
An acquisition is just what it sounds like – the purchasing of one company by another. It isn’t just for megacorporations who want to devour and assimilate their competition, either. More and more frequently small businesses and startups have been getting in on the Mergers and Acquisitions game as well. There are plenty of reasons why smaller operations can benefit just as much, if not more from acquisitions as their gigantic older brothers.
Buying a company can introduce fresh talent and perspective in addition to the obvious physical and financial assets. But it’s important that you handle the acquisition properly, lest you end up overpaying for a dud of a business!
Identify Your Goals
Buying a business is a big-ticket purchase that requires a great deal of research and preparation. It’s not something that you want to charge in half-cocked, lest you find yourself stuck with a lemon of a business and a painful hole in your wallet! You need to know in no uncertain terms what you want to get out of the new business. Is your intent to expand your market into new territories, or are you simply trying to knock out one of your competitors? Only by knowing your goals for acquisition can you develop a plan to make it happen.
Gather Your Allies
No matter what you tell yourself in the mirror to get pumped up in the mornings, the harsh reality is that none of us can do everything. It takes teamwork to accomplish anything of merit, and if you want your acquisition to go smoothly, this is no exception. You might want to consider enlisting:
An Investment Banker to help evaluate the financial stability of the company.
An acquisitions attorney to explain the process and ensure that everything is done by the book.
An executive to manage the rest of the team. This person is usually a CEO and reports the progress on the acquisition to the board of directors.
A human resources specialist to help organize and integrate the staff of the purchased business.
An IT specialist to assist with integrating the purchased business’s technical infrastructure with your own.
A public relations officer to promote the merger to the public.
The scope and skills of your team will depend on your own specific needs, but the above are all good places to start.
“Due diligence” really just means taking the time to really investigate the company that you’re interested in purchasing. It can be broken down into two parts – research done before contacting the company and the information gathered directly from the company and its facilities.
During the first phase, you’ll want to review the company’s web pages, SEC filings, job listings – just about any publicly available information that could be useful when drafting the contract. Make sure that there aren’t any unwelcome surprises waiting for you and that acquiring the company will further the interests of your own. Anything that would lower the value of the company can come in handy during future negotiations, too.
Next, you’ll want to get in touch with the company that you want to purchase. Meet the owners and the management, look over the condition of their equipment, and tour their facilities if the option is available. Come equipped with plenty of questions for management, too. Ask about the company’s work culture, their actual numbers, and the quality of their equipment. Important documents to ask for include a summary of the business owner requirements, a summary of top customers and vendors, an annual review of the owner’s benefits, and three to five years’ worth of financial data containing at the very least profits, losses, and an overall balance sheet.
Get Your Documents Together
Here are the main documents that you’ll want to get together on your end:
A Non-Disclosure Agreement – This will protect any confidential information from being shared. It can also stipulate that such confidential information, if kept in any sort of hard copy, must be returned upon request.
A Letter of Intent – Once you’ve signed the NDA and evaluated the company’s finances, the Letter of Intent serves as an official declaration that you intend on purchasing the company in question.
The Confidential Information Memorandum – These are the documents that give the Buyer the information they need to make their first offer. They typically include summaries of the Seller’s business, industry, and market opportunities along with their financial information and a summary of the auction process.
Indication of Interest – This document, much like the Letter of Intent, serves as an official written declaration that the Buyer is interested in making a deal. It is, however, more vague in its terms than the following Purchase Agreement.
Purchase Agreement – This is the legally binding contract between Buyer and Seller. The specific details will be defined by the nature of the acquisition.
Make a Good First Impression with Your First Offer
During an acquisition, it is up to the Buyer to make the first offer. While it can be tempting to lowball the Seller initially, it is important that you offer up a fair price to start things out on the right foot. If the Seller has reason to believe that the Buyer is being less than honest in their negotiations, then things can fall apart fast. Stay open to counteroffers and keep in mind that you’re also paying for the company’s personnel and its reputation. An offer between 75 and 90 percent of the company’s value is considered reasonable.
Start the Negotiations
Negotiations can require some finesse. Don’t worry – if this is your first rodeo (well, your first acquisition) then you’ll surely get better in time as you gain more knowledge and confidence. Stand your ground but don’t be so stubborn that talks break down entirely. Do your best to avoid paying more than you need to, but don’t be such a bean counter that you shortchange the Seller out of everything but the clothes on their back!
Price isn’t the only consensus you’ll need to reach. When the Seller makes a counteroffer, ask them to justify it. This can help alert you to potential issues down the line that the Seller would rather you not be aware of! Both parties will need to agree on which staff to keep and which to cut, too, which can be a hard call to make.
Draft a Contract – But Should You Draft One Alone?
Drafting up a contract is when negotiations get tough. At this stage, it’s a good idea to hire an attorney who can advocate for your best interests and explain complicated legal jargon in plain English. They can also help thwart costly mistakes and oversights in the contract, in addition to ensuring that it isn’t written heavily in the other party’s favor.
Looking to start a business or grow your current business? Contact FL Patel Law today by visiting our website, www.FLPatelLaw.com, or calling 727-279-5037.
Tyler Thompson is a second generation St. Petersburgian with a passion for reading and writing. In 2018 he finally made his way to FL Patel Law PLLC where he has found a home for himself as Project Manager. He is an unapologetic dog person who enjoys spending what free time he has with his friends and family.
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