Buying A Business : Pre-Offer Phase
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Buying A Business: Pre-Offer Phase
Edward L. Fixen, President
BusinessQuest
This article is the first of a three part series discussing the basic process and steps involved in buying a business after you have found a business that meets your acquisition criteria. Part One discusses the pre-offer phase, Part Two the offer phase and Part Three the due diligence phase of buying a business.
Steps in the Pre-Offer Phase of Buying a Business
1. During the pre-offer phase of investigating a business to buy, at a minimum, you should gather and review the following information:
a. Profile of business identifying:
i) Name of legal entity and any associated DBAs
ii) Address
iii) Website domain name(s)
iv) Number of years in business
v) Size of facility, lease terms and rate
vi) Number of employees
vii) Type & estimated fair market value of furnishings, fixtures & equipment (FF&E) included in sale
viii) Type & value of inventory at cost (if applicable) included in sale price.
ix) Reason for sale
x) Asset or Stock sale. If asset sale, what assets if any are excluded from price. For example, cash and accounts receivables are often excluded from the sale of smaller businesses. Also, verify if the sale includes the assumption of any equipment leases or other debt.
xi) Terms of sale. Will the seller finance a portion of the sale price or is the buyer expected to obtain their own financing.
b. Three (3) years of tax returns and financial statements. In addition to financial information, tax returns will also provide an indication of the number of owners and ownership structure of the business.
c. Current year-to-date financial statements (i.e., P&L and Balance Sheet)
d. Monthly financial statements for the most recent year
e. Itemized list of any income adjustments such as interest, taxes, depreciation, amortization, fair market rent adjustments, owner compensation, family members on payroll, owner personal benefits such as personal auto, health insurance, etc and any one-time adjustments
f. Sales by customer report with actual customer name removed. This report is important to identify any potential customer concentration issues.
g. Organization chart or list of employees with title and compensation.
h. Any other key information relevant to the subject business or industry
2. Hold one or two preliminary meetings with the seller to discuss the business, discuss the findings of your preliminary review and discuss in detail any information that stands out as unusual or inconsistent. You will want to discuss the basic terms of post-acquisition training that the seller will provide as part of the purchase price and non-compete agreement to be included in the price. You may also want to discuss the seller’s willingness to stay on for some extended transition period as an employee or consultant.
3. Perform a site visit to the business/facility to observe general working conditions and get a cursory assessment of equipment and inventory. Obviously, confidentiality is of utmost importance and should be discussed with the seller prior to visit.
Keep in mind that the pre-offer phase is not an exhaustive due diligence phase. There is much more additional detailed information, such as bank statements, accounts receivables, invoices, etc. that for legitimate reasons of confidentiality are generally not made available until after an offer has been accepted and due diligence begun. Pre-offer due diligence should be an effort to identify any major red flags and determine if the business will meet your acquisition criteria and goals, subject to detailed due diligence.
It should also be noted, that small and mid size businesses are never risk-free or free from some aspects that would not concern any reasonable buyer. For instance, it is common that most small and many mid size businesses are either heavily reliant on the owner for customer relationships, have some degree of customer concentration, have less than ideal books & records, use creative accounting practices, etc. or some combination thereof. Unless there are some extraordinary circumstances or degree of risk, these risks should not necessarily preclude you from developing a deal structure that would mitigate the risk and meet your goals.
If after your review and meetings with the seller, you are still interested, the next step in the overall acquisition process is to tender an offer to determine if you can arrive at a price and terms acceptable to both you and the seller. In my next article, we’ll discuss the offer phase along with important considerations and strategies for structuring an offer.
Author: Mr. Fixen is an MBA, Accredited Business Appraiser (AIBA) and Certified Business Broker (CBB). Mr. Fixen is the President of BusinessQuest, a business valuation and M&A brokerage firm serving small & mid size, privately-held businesses throughout California and can be found at www.BusinessQuestBrokers.com.
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