Growth Through Business Acquisitions

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For many small business owners, one of the smartest growth strategies is through business acquisition. Acquiring an additional business can offer increased capabilities, such as new niche products or technologies, a larger market share, resource sharing, diversifying revenue concentration and many other advantages.

Overall, a successful business acquisition should improve a company’s synergistic performance. In other words, when a company combines its value and performance with another company’s respectively, the result should be greater than the sum of the two separate companies. Once the synergies are realized, the result should be greater financial results.

With today’s stronger economy, there’s no better time to buy a business – for both existing business owners and first-time buyers. Many Baby Boomers are entering retirement and exiting their businesses, resulting in a strong inventory of businesses for sale with healthy financials. Furthermore, small business financing is easier to obtain than years past and interest rates are still low.

Working with an experienced Business Consultant through the acquisition process can be very beneficial as they will work as an extension of your organization ensuring you’re asking all the right questions and gathering all the relevant information.

Here are 6 key steps small business owners can take to benefit from the positive small business environment and ensure a successful business acquisition.

  1. Define your acquisition strategy. To avoid getting overwhelmed in your search for the right business, it’s important to have an acquisition strategy. What are my business goals? Do I want to diversify? Do I want to expand nationally? Does the potential acquisition have management in place, will this be a roll-up, what about existing employees, what is the culture?
    Develop a search strategy. There are several ways to search for an existing business to acquire: Online marketplaces, working with a professional business broker, networking with friends and professional colleagues as well as approaching a business owner directly to ask if they are interested in selling.
  2. Determine if the business is a good fit. Once you’ve selected a business to acquire, this is where you evaluate if it not only matches with your acquisition strategy, but also improves your company’s overall synergistic performance. Your new addition should bring additional value to your company, such as offering you additional retail stores in key geographic locations that allow you to penetrate key markets. Or, it may add value through offering a new manufacturing facility that can produce new products at a lower labor cost. There is also the potential of new talent you’re currently lacking, i.e. sales, management, administrative support, etc.
  3. Determine if the asking price is reasonable. The business you have identified may appear like a winner on the surface, but it’s important to conduct thorough due diligence and confirm if it’s really worth the price they’re asking for it. A reputable business should be able to produce financials going back at least 3 years, including tax returns, profit and loss statements, cash flow statements, and current balance sheets. Ask the owner how the price was determined and make a thorough assessment of all the businesses assets, including inventory, equipment, existing leases, contracts and employees. The asking price is typically a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization.) The industry and acquisition activity in that specific industry will determine the multiple.
  4. Examine the company’s debts, liabilities and legal status. Ask the owner if the company has any outstanding debts, as well as any other obligations, such as ongoing litigation. Find out if the owner has the full legal authority to sell the business, or if you need full approval from a business partnership. Ask to review all leases and legal permits. If the business property is leased, ask to review the terms of the lease to determine if it can be transferred over to a new owner.
  5. Capital requirements and financing. The amount of capital you are able to invest will have an impact on the type of business you are able to acquire. It’s a good idea to plan ahead and have your company’s financials prepared ahead of time and see what type of funding you can receive from lenders. There are a wide range of funding options available these days, including SBA government backed loans, traditional bank loans, lines of credit, cash advances, and loans from alternative lenders. Plus, many business owners are willing to offer seller financing in order to close the deal, giving you leeway to negotiate the right down payment, length of the loan, monthly payment and interest rate.

As a small business owner, acquiring a second business can offer a path to growth and additional revenue. Developing a clear strategy and conducting thorough due diligence can streamline the process and increase the odds that your acquisition is a successful addition to your portfolio. Contact us today to learn more about how an experienced ONE8ty Business Consultant can assist you with a business acquisition.