Business Basics for Buyers
Why Do I Need to Sign a Confidentiality Agreement?
Agreeing to keep all information about the opportunity to purchase or
invest in a business confidential is an important prerequisite to learning
anything at all about the specific opportunity. This is because uninformed
employees, suppliers and customers may assume that the company is in trouble
or that they will be left without jobs, warranties or payment due.
Their inappropriate reaction which may include key employees leaving employment and suppliers cancelling payable terms may cause severe hardship on a company where confidentiality is breeched.
You typically will be asked:
- Not to divulge any information regarding a company's operation or financial position,
- Not to contact the owner or employees directly,
- Not to reproduce or divulge information to others,
- To use this information solely for the purpose of evaluating interest in buying the company and,
- To return all information provided upon request.
A brokers role is bringing the parties to agreement in accordance with the terms imposed by his or her principal. Usually the broker plays some role in the negotiation process, even if it is limited to presenting the terms under which a business is offered for sale. A broker is held to a duty of undivided loyalty to the party who has retained him or her and in most states this must be disclosed in writing to all parties.
Experience from previous transactions can make the good broker invaluable. He will have an opinion about the realistic market value of the business. And he will know the information requirements and the preferred sequence of events that can keep a transaction on track. An understanding of the seller's retirement plans alone can help put a deal together that otherwise would crash and burn.
How To Simplify The Process.
The acquisition process can seem overwhelming to even an experienced buyer or seller. Let's put it into steps. Acquisitions require significant time and financial expense, with little assurance of success. Less than half of the initiated transactions to buy a particular business actually complete. The steps include:
- Determining you investment objectives,
- Searching for the right opportunity,
- Valuing the business,
- A detail investigation of the business prior to investment,
- Negotiating and managing the transaction and
- Closing the deal.
An aggressive time frame to complete these steps is approximately 2-3 months.
From the perspective of the buyer, initially there needs to be an examination of your objectives in owning an actively managed business. Don't skip this step. Now remember you can also start up a company from scratch.
So include in your evaluation an acquisition compared with other strategies to get into business. After consideration of the benefits of buying a company over starting one the general conclusion is usually that if you are managing it yourself, taking over an existing business is generally less risky to do than to start a new business.
In general with an acquisition, you will not get as high a return as venture investments, but it will be more immediate and should be higher than in passive investments such as public company stocks & bonds.
Searching for the right opportunity
The acquirer should prepare a written checklist setting forth acquisition objectives and the criteria that an acquisition candidate must satisfy. In developing criteria for potential targets, the acquirer may consider
- Type of products or services sought
- Price range of target company
- Sales volume and/or market share of target
- Profitability in terms of ROI or ROA
- Willingness of target's management to remain after acquisition
- Number of employees
- Compatibility of corporate cultures
- Patent position of target
- Geographic location of target
Keep in mind that if you are unrealistically stringent in your requirements, no progress can be made. The written criteria should strike a balance between such overly precise definitions that few prospects could qualify and such loose definitions that any targeted company could qualify.