A Blueprint for Success: Understanding the 4 Stages of Buying a Business

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Team buying a business

Buying a business is a significant and complicated transaction that can feel overwhelming if approached all at once. Breaking the process down into manageable phases makes it seem a little less daunting, especially when you’re consulting with experts along the way.

From initial considerations to the final steps, let’s review the complexities of a business acquisition, and we’ll outline a few insights and strategic highlights you should be aware of in each phase. 

Do The Groundwork Before You Purchase A Business 

Nobody just wakes up one morning and decides to buy a business. There’s usually a lot of thought and research before the idea has even come to fruition. But, if you’ve decided on your course of action, getting prepared is the foundation to launch from.  

Firstly you’ll want to put together your team. You’ll need trusted legal and financial advisors to direct you as you work toward acquiring the business you want to buy. A lawyer with experience in business acquisitions should be involved in the transaction right from the beginning. Your financial partners include investors, bankers, and other capital providers, as well as an accountant who specializes in corporate investment. And, you should seek advice from professionals in business valuation, IT, human resources, and marketing who you may already work with. If you’re bringing in external experts, ensure you have transparent agreements on retainers, fees, success criteria, confidentiality policies, and will be able to manage or prevent any conflicts of interest along the way.

Establish distinct goals. Determine the purpose behind acquiring a business and how it aligns with your strategic objectives. Work on developing honest and open lines of communication with your team of experts. This will enable you to formulate a clear acquisition plan and refine the selection of potential target companies you might look at buying.

Create an acquisition plan. An acquisition plan is a roadmap for you, your acquisition team, and your advisors which basically outlines your plan of action, goals, and how you will achieve them. It should include:

  • A projected timeline and maximum budget
  • The main attributes you’re looking for in the business you buy
  • The risks you’re willing to accept
  • What each member of the acquisition team is responsible for
  • What the stages of the process overall will look like and who will be involved at each step

This plan will aid in conveying your goals to stakeholders and prevent you from pursuing unsuitable opportunities. Just like when house hunting it can be a tiring process hunting for that precious gem that checks all the boxes on your wish list. Having patience and diligence when reviewing potential companies always pays off in the end.

Look for the business that fits your plan. Now that you’ve set up a solid foundation, it’s time to find the businesses that meet the criteria set out in your acquisition plan. 

  • Are you searching for a franchise or independent business? 
  • Is your focus on manufacturing, retail, distribution, consulting, or an online business? 
  • Do you want to take over a competitor or turn around an underperforming business?

Some of the indicators that the business you’re researching will be a good choice are that it’s proven to be a success, the product or service compliments those of your business portfolio already, and it has scalability with room to grow in the market.

Talk to people in your business network or other industry contacts as well as ask your team of advisors to recommend potential candidates. There are also firms that specialize in mergers and acquisitions that you can hire as consultants if and when needed. Or, if you already have a business in mind, be sure that it fits with your acquisition plan.

Make Sure You’re Prepared For The Purchase Negotiations

Don’t walk into negotiations without your ducks in a row. Make sure you’re ready for anything that comes up in your discussions so that there is a successful outcome.

Before walking into a negotiation arrange your financing. Meet with potential lenders and investors before approaching a business you want to buy. You’ve created a budget but you’ll want to be clear about how much capital you can put toward the purchase, how much equity other investing partners can contribute, and what kind of terms your bank is willing to offer. Doing this ahead of time also gives you the chance to look for other options for financing if you need to.

Involving these financial partners early will ensure they’re in agreement with your plan and it will give you a chance to tap into their expertise in business acquisitions as you work through the process.

Research the business and meet with the seller. Doing informal research on the business you want to buy before you plan meetings with the seller is a smart approach some investors overlook. 

  • Learn about their operational and financial performance, and whether their brand is strong and has a solid reputation 
  • Scan their reviews and social media feeds for customer or employee complaints then check the websites of regulators to see if there are legal actions pending
  • Check LinkedIn to see if their staff have the skills you need and if there’s a solid management team in place
  • Research the industry to see if the company is susceptible to technological changes or in a highly competitive market. For example, does it own intellectual property or technology that can benefit you? Or, is that the missing link?

When you meet with the seller, see if their management style is aligned with yours and find out more about their motivation for selling. Having long, extensive conversations will help you make sure they are not likely to back out of the deal at the last minute. The point of these meetings is to collect all the information you need to draft your letter of intent and to feel confident in your choice.

Draft and negotiate a letter of intent. Now that the prep work is done and you have chosen the target for your business acquisition, it’s customary to sign a confidentiality agreement and write a letter of intent. This confirms your interest and the documents will serve as a framework for negotiations while protecting the sensitive information of both parties.

The letter of intent contains specific information including the purchase price range, the seller’s commitment to providing records, terms of confidentiality, and a promise of exclusivity from the seller (ie. they will not consider other offers).

What’s Involved In Negotiating Your Business Purchase

Now that you’ve covered the initial stages of buying a business and have chosen which business you want to purchase, it’s time to negotiate the details with the seller. 

Make sure to cover the due diligence. Before you sign on the dotted line, it’s important to do an in-depth review of the legal and financial conditions. The vendor will provide you with comprehensive commercial, financial, legal, and other information so you understand how the business works. The due diligence process will basically confirm this information and focus mostly on a legal and financial review. It also gives you the opportunity to look at other areas of the business like their customer, supplier, and employee contracts, as well as their IT structure. It’s important to hire qualified professionals to conduct these reviews, and it may take a few months depending on the size of the business you are thinking of buying.

Negotiate the purchase price. The final purchase price will be based on a variety of factors, including the business’s earnings before interest, taxes, depreciation and amortization (EBITDA), a formal appraisal, the results of your due diligence process, and more. 

During these discussions, you typically determine the portion of the total purchase amount to be paid upon finalizing the sale and the portion to be retained in escrow or contingent upon certain conditions. Your interactions with the seller should lead to a price that is mutually satisfactory.

Typically, there are adjustments to the purchase price based on the business’s condition on the day of the takeover. A crucial adjustment pertains to the working capital amount on the closing date. It’s essential to establish a reasonable target during financial due diligence to ensure that you can operate from day one without the immediate need for additional funds injected into the business.

Confirm your financing. Because you secured your financing options earlier, this stage should only involve finalizing the details based on the agreed-upon purchase price.

Making Your Acquisition Final

During this final stage of the business acquisition, your legal and financial team will come into full play. Their advice and expertise will play a big part in ensuring that your business purchase is a successful one with no lasting regrets.

Finalize the purchase agreement. The purchase agreement will include details on the scope of the transaction, the payment terms, and any indemnifications and warranties. 

Representations and warranties are the core of the purchase agreement and are all about risk allocation. It’s where the seller formally describes the condition of the business and makes disclosures about any issues or problems of which it is aware.

Covenants are the actions the buyer and seller agree to take, both before and after closing. As an example, the seller will agree to run the business normally until the sale closes, without making any radical decisions in the meantime. A non-compete agreement may also be part of this, where the seller promises not to work for a competing business for a specified number of years.

In the majority of acquisitions, there is a time gap between the signing of the purchase agreement and the actual closing of the transaction, which is when the buyer officially takes control of the business. The closing conditions are obligations that the seller commits to fulfilling during this interim period to facilitate the successful closure of the deal.

Indemnities are a pivotal section of the purchase agreement, outlining the terms governing compensation that the seller must provide if disclosures about the business prove to be inaccurate or if agreed-upon covenants are not followed. The seller’s liability does not last forever and is typically capped at a specific percentage of the purchase price. The current standards for indemnity in Canada have undergone significant changes in recent years so it’s imperative for both parties to work with their expert advisors at this stage.

Be Sure To Get Expert Legal Advice When Buying A Business

When you’re buying a business, it’s essential to have legal experts by your side like our team at Hukam Law. There are many ways that an experienced commercial lawyer can save you from future problems and expenses when acquiring another company. If you’re in the first stages of buying a business, give us a call 📞 at 705-915-0884, or send us an email at info@hukamlaw.ca, and we’ll ensure that all the proper paperwork is in place, all the ts are crossed, the is dotted, and your due diligence is done for a successful acquisition.

***The information provided in this blog is for general informational purposes only and should not be construed as legal advice. If you have legal questions, we strongly advise you to contact us.