If you have just decided to start the process of buying your
first company or if you are a seasoned mergers and acquisitions
professional, you as a business buyer, need to utilize a
disciplined, structured approach to purchase the best business
acquisition possible. This article will give you a shortcut to
incorporating most of the elements you must have to
systematically qualify and “bias” the business purchase
negotiations in your favor with the business seller.
Buying a business is a “one off”, iterative process in that each
purchase opportunity is unique and different with regard to its
sense of urgency from the seller’s perspective. However, as
each purchase situation is different, if you do many business
acquisitions over time you quickly see that there are
fundamental elements to the location, qualification and
negotiation processes of buying a business, that once learned,
can be leveraged repeatedly from one business purchase
opportunity to another.
Four Steps to Business Valuation and Purchase/ Sale Analysis
With the intent to be brief yet adequately cover all the
important elements of the business appraisal and deal structure
steps of buying a business, we will only focus on these
elements within the typical business purchase process:
1) Company Analysis Steps:
Review all information obtained from the seller as solicited
in the buyer’s Letter of Intent or “LOI”:
All financials, leases, insurance policies, tax returns,
contracts, environmental reports, legal documents,
retirement programs, inventory counts, patents, licenses,
policies, customer lists
Adjust historical financial statements provided by the seller
to represent profits that reflect actual business
performance and exhibit correct asset and liability values
Compare adjusted financials to key, like industry,
performance metrics
Evaluate all non-financial elements of the company Customer
sales mix, customer retention rates, customer locations,
employee counts and performance metrics, landlord contracts
and lease provisions, bank/financing relationships, key
suppliers and critical product or service content and
warranty issues…to name a few
Prepare a “zero-based” budget for the next 3 financial terms,
including anticipated monthly cash flows for the business
including acquisition debt service requirements
2) Business Valuation Steps:
Calculate an asset based approach to business value
determination
Calculate a profit based approach to business value
determination: This will require use of capitalization and a
wide variety of Discount rate elements based on: Projected
real returns with inflation assumptions Industry growth
factors and risk influences Management additions or
deletions and compensation changes A wide variety of non-
financial factors and assumptions
Calculate a cost to replace company assets approach to
business value Determination
Weight each of the business valuation methods for relevancy
based on historical business performance, future performance
assumptions, various non-financial aspects of the business,
the anticipated final terms of business purchase, the
financial and human resources that will be available to take
the company where you want it to go
3) Business Purchase and Sale Analysis:
Select specific assets and liabilities to be purchased
Identify a $ allocation to each asset and liability you
select
Analyze various means to purchase current debt obligations,
consider seller contingencies
Rank each means to purchase current debt obligations and
select the best for your constraints
“Run the numbers”: put together a monthly and annual post
sale cash flow analysis for both the business buyer and the
seller. Emphasize positive cash flows for eventual seller
presentation.
Test your proforma financials for possible seller “numerical
exaggerations” or mistakes
4) Communicate Findings and Analysis to Seller:
Your primary objective is to justify your desired company
purchase terms in a professional manner, to maximize your
credibility and foster constructive dialog with the seller
All findings and analysis should be proof read before
presented to the seller
All documentation should be organized in a professional,
somewhat formal Format
The information should be introduced as a “starting point”, a
basis of further discussion
Your data should include numeric analysis responses to
anticipated seller Positions
Consideration should be made to have a professional, “non-
buyer” present the findings
All documentation should be also used for future lender, key
supplier, landlord and employee presentations.
Each presentation customized or fortified for the targeted
audience.
(This step is where all your purchase “weapons”
are shown, but not necessarily used)
Purchasing a viable business can be a complex and emotional
experience for both the business buyer and the seller. The
business seller often has much of their life and money wrapped
up in the enterprise and is looking for the long awaited “pay
day”, while the buyer typically has an intense “opportunistic”
disposition fueled by a “seek and conquer” methodology.
The more a business buyer can take the emotion out of the
purchase negotiation with effective development and
professional presentation of key financial and non-financial
justification content, the greater his probability of reaching
HIS desired business purchase terms with the business seller.
The business analysis and valuation steps in the business
buying process are key components to reaching this ultimate
objective.
About the Author:
Mark Smock is President of
, the
FIRST international business buyer directory of its kind.
Business Buyer Directory provides a non-traditional means for
proactive business buyers to locate businesses for sale
worldwide that meet their exact registered purchase criteria.
