NorthBridge can perform a search for entrepreneurs and private equity firms searching for a business. In reality, entrepreneurs and PE firms infrequently use the services of an M&A firm to identify acquisitions. They most likely make their intentions known to brokers and M&A advisors (collectively M&A Advisors) who are sell side advisors. By making themselves known to brokers and M&A advisors, they increase their chances of being contacted once a desired opportunity comes to the attention of the M&A advisor.
However, it is worthwhile to highlight what a buyer should be looking to have in place in order to buy a business.
IDENTIFY THE BUSINESS
Assess the Type of Business and Reason for Ownership. First, think about the kind of business you would like to operate. Is it replacing a job in which you intend to spend a lot of time devoted to the business, or a business that you will have an ownership interest in, but not directly manage? Is it something that you are passionate about? It is said that 90% of first time business buyers do not buy the business that they initially inquired about. A buyer could do a lot to improve on those statistics if he or she had a reasonable idea of the type of business that would suit him or her the best.
Experience in the industry you are pursuing is helpful as well. Banks look more favorably on buyers who are experienced in the business they are looking to buy. If seller financing is going to be required, the seller will want to be comfortable, that the buyer has the wherewithal and industry understanding to be able to profitably operate the business – and repay the seller note.
Contact an M&A Advisor to Identify a Business. You can identify a business by contacting an M&A Advisor. They may already be representing the type of business you are looking to buy or will contact you when they have such a business.
Provide Qualifying Information. Accumulate the information that you will need to buy the business. The buyer will have to show that they have the wherewithal to buy the business. That includes the finances as well as background information evidencing why the buyer is a good fit for the business being pursued. The balance between these two is like a see saw. If the buyer has cash to buy the business, they won’t need a bank loan or a seller note. If the buyer does not have cash for the whole purchase price and working capital needs and needs a bank loan or a seller note, the buyer will have to show why their experience and business plan is worth the risk to the seller.
NDA. Once a business is identified by the buyer, a qualified buyer will have to sign a Confidentiality / Non – Disclosure Agreement, (NDA) ensuring the seller that the shared information will remain confidential.
Confidential Information Memorandum. At or around this time the seller or broker will share the Confidential Information Memorandum (CIM). This is prepared by the M&A Advisor and approved by the seller as the seller’s representation of the business. It includes financial information, market overview, market opportunity, organization chart (likely with no names), customer and supplier concentration (likely without identifying the specific name of the third party), assets owned to be transferred upon sale and other relevant information.
Involve Outside Advisors. At this juncture, the buyer will likely want to engage outside assistance from his accountant, to review the financials for the company and perform some level of due diligence. The buyer will also want to engage an attorney familiar with the sale of businesses. The outside advisors should have experience in serving clients buying or selling a business.
Industry Analysis. The buyer performs an analysis about the business and the area. The buyer also needs to assess whether the business provides an adequate return for the investment (asking price) and the effort that will be expended.
Meet the Seller. It is perhaps a good idea to meet the seller before formulating an offer. It is important to have a good relationship with the seller since the knowledge transfer will only help the buyer’s success after he or she buys the business. Even if you think you can take the business quickly to the next level, you want to develop a good relationship with the seller to facilitate this process. This initial meeting might be offsite in the office of the broker handling the transaction. It gives you a good opportunity to speak to the seller and make inquiries on the business based on what you have learned from the CIM and industry information. It makes sense to bring your advisors to this meeting and the broker should be present as well.
Visit the Location. Remember that this is likely still a confidential situation in that view if any employees may know about the owner’s desire to sell the business. If the buyer needs to see the business “in action” or during normal business hours that is a reasonable request, but arrangements need to be made by the broker.
FORMULATE AN OFFER
The initial offer is in the form of a Letter of Intent (LOI). The offer will likely have contingencies such as satisfactory completion of financial, legal, and business due diligence; transfer of the lease if any, etc. The offer might also include a knowledge transfer period that exists for a defined period after the transaction is closed.
Once the offer is accepted the parties can proceed towards due diligence.
The final area is the review of the details of the business or due diligence. This not only includes a review of books and records, but other information as well. The M&A Advisor can assist in providing this information, but remember the M&A Advisor represents the seller and these are the seller’s representations so it is up to the buyer to make sure that the information is satisfactory. Simultaneous with due diligence, the parties are negotiating the details in the Purchase and Sale Agreement. The negotiation of the Purchase and Sale Agreement is typically handled directly by the lawyers with other parties contributing. The more specific the terms are in the final LOI, which precedes formal due diligence and the preparation of the Purchase and sale Agreement, the easier it will be to finalize the provisions of the Purchase and Sale
The buyer needs to finalize his or her financing, obtain necessary regulatory approvals, if necessary.
The final step is to set the closing date and begin the experience as the owner of the business.
Execute on the knowledge transfer aspect of the transaction that was agreed upon prior to the closing.