From Search To Success: How To Identify And Acquire A Viable Business

Looking to identify and acquire a viable business? Finding the right option that is sure to bring you returns is a time-consuming and challenging task. When you start to search around, you’ll come across any number of options. But not all of them are viable.

Expert M&A advisors suggest a different approach. Instead of scouting around the market looking for suitable businesses to acquire, you’ll put together a checklist of must-have fundamentals. The next step would be to identify options that fit your criteria.

Stepping into the market with a well-planned tactical approach will raise your chances of success. For instance, the company’s life could be a good indicator. As a rule, close to 20% of startups fold within the first year. Another 45% won’t make it beyond their fifth year.

At least 65% will close their doors within 10 years. And, an astonishing 75% will go under in the first 15 years. You can safely assume that the longer the company has been running successfully, the higher its chances of survival.

Of course, age isn’t the only benchmark you’ll use when searching for the right company to purchase. Read ahead to understand how to navigate the process.

How to Identify and Acquire a Viable Business? Outline Your Goals

Before searching for companies to acquire, you’ll outline the objectives behind the call. What are your end goals?

• Is your decision driven by a preference to run and scale an established business instead of building one from the ground up? Do you want to build on a proven concept?
• Do you intend to stabilize a distressed business and sell it for a profit?
• Are you looking to build a passive income stream by investing in a profitable company?
• Do you expect to invest more money into scaling the company?
• What is your expected timeline for holding the investment before liquidating it?
• Do you have the necessary skill sets or any industry-specific expertise? Or, do you intend to retain consultants to help you run the company?
• Do you intend to play an active role in managing the company? Or, will the seller stay on as a managing consultant?
• Is your targeted acquisition within the same industry or are you looking at vertical or horizontal options?

 

Having established your mission, you can move on to the next steps. For instance, seasoned founders who have built and exited companies may have extensive knowledge and expertise within a particular vertical.

In that case, it would make sense to select a company from the pool of options within that vertical.

Estimate the Funding You’ll Need

Your objectives and goals often go hand-in-hand with the acquisition budget. Many entrepreneurs are ready to sink the money they earned from a successful exit into a new venture. Others have running companies but want to diversify and expand. If this is you, finance should be next on your to-do list.

Work out how much personal funding you’ll invest and the financing you’ll raise from partners and external investors. Once you have an estimated budget in mind, you’ll retain the services of an expert M&A advisor. This professional can help you to identify and acquire a viable business.

They will also assist you through the entire acquisition process, drawing up the necessary paperwork, and other legal nuances. Your budget will also determine the type of business you intend to acquire.

• eCommerce business
• Competing brand
• Operating within local, statewide, or global markets
• Manufacturing unit
• Consultancy service
• Retail trading outlets or chain
• Distribution and logistics network
• Franchise or independent company

Building a New Company Or Purchasing an Existing Company–The Better Option

Purchasing an established company does come with its advantages. You can conduct the necessary due diligence to test its viability. For instance, examining the financials, its customer base, churn rate, sales, revenues, profits, brand value, market share, and market presence.

You’ll also screen its product portfolio, supply chains, inventory, suppliers and vendors, and network of distributors. A fully operational company that is generating revenues and profits ensures minimal risk for buyers.

However, you can also expect to pay premium prices for it. Your focus should be on discovering why the seller is ready for an exit. Scouring macroeconomic conditions for downtrends is a smart move. Be ready to navigate the pitfalls and challenges that the company will bring.

At this point, you should also assess the target’s prospects. Are the products innovative and saleable? Or are they likely to become redundant within the near future? Is the company’s core concept disruptive and unique or is competition for the niche products high?

You’ll also prep for the integration process and achieving synergies, particularly if you intend to merge it with your company. All of these tasks will require pre-purchase investment since you’ll retain a team of experts to evaluate the candidate. And, do the due diligence. Work the costs into your budget.

Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

Research Business Marketplaces Within Your Targeted Sphere

By now you’ll have a fair overview of your mission from the acquisition, budget, and type of business to purchase. Start looking for potential opportunities by searching online listings on business-for-sale websites. Target industry-specific and business brokerage websites as a starting point.

But, if your objective is strategic alliances, search satellite industries to achieve operational and cost synergies. Most online business listings cover a broad range of businesses from different industries, niches, models, and locations. You can also look for small startups to mid-sized companies.

Expect to invest time and sweat equity before you build a list of potential businesses to acquire.

Leverage Your Network for Assistance

As a seasoned entrepreneur, you probably have an extensive network of contacts within the industry where you work. You can also leverage your M&A advisor’s network to identify and acquire a viable business. These professionals connect with other advisors and colleagues and can help.

They are also in contact with entities looking to make a profitable exit and can provide you with the necessary database and resources. Many business owners looking to retire or pursue a fresh concept are willing to delegate their companies to capable hands.

You can connect with these entities at networking events or by reaching out to personal connections. Make your intentions to acquire a company known, and you might just connect with a seller confident of your capabilities. Or, you may gain leads that you can tap for a viable investment.

Personal relationships help build trust and rapport between dealmakers leading to successful M&A mergers and transactions.

Screen Potential Opportunities Carefully

Putting together the list of potential opportunities is just the initial stage. The real hard work starts when you must assess them for suitability.

Compile a Team of Professionals

To conduct due diligence, you’ll put together a team of experienced professionals headed by your M&A advisor. You’ll need accountants to evaluate the target company’s financials and look for hidden pitfalls. Typically, financials going back at least three years are under scrutiny.

You’ll also need an expert attorney specializing in mergers and acquisitions who can draft the deeds and agreements. The lawyer will work with your M&A advisor and assist at the negotiating table. Their job is to ensure that the buyer’s interests are taken care of.

Keep in mind that drafting legal documents like merger agreements, asset purchase agreements, shareholder agreements, and other paperwork needs precision. You’ll want to ensure compliance with local, state, and federal regulations.

You’ll also need legal assistance to ensure compliance with anti-trust laws and ESG regulations. Not identifying any critical issues can lead to serious consequences after the acquisition. Your attorneys will also make sure that the different purchase clauses prevent future disputes and lawsuits.

An accredited financial advisor is another must-have on your team. You’ll need their assistance to examine every aspect of the target’s financials for discrepancies with, say, tax obligations and reporting. Also, understand its cap table, accounts receivables, accounts payables, P&L statements, and balance sheet.

Examining employee compensation packages should be high on your list of priorities. You’ll look into the option pools, benefits, wages, retirement, pension plans, and other payment structures.

If you’re purchasing a cross-border company, you’ll also pay attention to local labor laws that may legally impede the transaction. Aside from helping you to identify and acquire a business, the team will assess for potential synergies, profitability, and integration.

You’ll need their assistance to ensure that the target company aligns with your business goals. And, is a good fit for your business model.

Run a Meticulous Due Diligence Process

Purchasing a business is a significant endeavor that requires a substantial investment of finance and resources. Rushing through the process invariably leads to overlooking pitfalls that can later result in losses or an unsuccessful acquisition.

Understandably, evaluating multiple candidates before you pick a suitable partner is expensive and challenging. But, it’s preferable to make this investment before signing on the dotted line and closing the deal.

Ask questions like:

• Why has the business come up for sale and what is the owner’s objective for the exit? What are the chances of the deal falling through before closing?
• How long has the company been operational?
• Are its products and services in demand? What’s the customer churn rate like? What are the customer acquisition costs?
• Who are the C-Suite executives, board members, and core team members? What do their LinkedIn profiles look like?
• Does the purchase price make sense? Can your budget cover the integration costs?
• Will you need to hire new skill sets and talent? Do you have the budget for it?
• Does the company have a robust brand value and market presence? Can you track its success record?
• What do social media sites have to say about the product portfolio?
• Have there been complaints against the target from employees, customers, or third parties?
• Has the target been involved in lawsuits or ESG complaints?
• What is the target’s culture like? What is the probability of successful cultural synergies?
• What are tangible and intangible assets the target owns? Do they add value to your company?
• What is the target’s primary source of revenue? Is it sustainable?
• Is the company scalable? Or has it reached its peak?

 

Not sure how to navigate the due diligence process? Know that the process is similar whether you’re pitching to investors for funding, selling, or buying a company. Check out this video in which I have explained how it’s done.

Reach Out to the Owner

Now that you’ve completed the due diligence, you’re ready to send an offer to the seller. Up until this point, the information and data you gathered have come from external sources. However, if the owner expresses interest, they may be open to providing in-depth information about their company.

Before you can access their internal data, you’ll sign a bilateral confidentiality and non-disclosure agreement. This step secures the seller’s interests and the company’s secrets in case the deal falls through. Sellers typically prefer to not announce a potential sale until the deal closes.

With the assistance of your M&A advisor and other team members, you’ll work out details like:

• Timeline for completing the sale
• How the transition will progress
• How the transfer of assets and stock will occur and their structure
• Managing human resources, severance checks, and cultural integration
• Transferring IP ownership
• Handling inventory
• Outstanding legal and tax issues the new owner must deal with
• Assets that the new owner can use as collateral to raise funding for the purchase
• Consideration for the sale such as a combination of cash and non-cash value.

 

This information is only an overview and the actual purchase process is intricate and involves several nuances. Rely on your advisors to assist you through the acquisition,

Before We Sign Off!

If you intend to identify and acquire a viable business, expect the process to be time-consuming. You’ll invest not only time and sweat equity but also resources and money. Due diligence is not exactly cheap and you will need to hire expert teams to guide you.

Making this investment is preferable so you are thorough with the assessment and make informed decisions. Taking your time will ensure that you avoid potential pitfalls and get rich returns from your investment.

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