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Buying a new business for the first time can be an exciting new venture. Acquiring a business instead of starting one from scratch inherently carries different risks but higher likelihood of success because you can already look at the business cash flow, its assets, operations, and profits before investing your time and money in it. You already have the consumer base, list of clients you are dealing with, and talented employees. Therefore, you don’t need to find a successful formula to run that business since it already exists. You simply add your unique skills & experience to increase the value over time.
This article discusses how first-time buyers can structure their offer to get the best deal, covering the most important steps that should be followed while making an offer.
The first step to buying any business is coming back to your fundamental questions associated with acquisition entrepreneurship:
Once these questions have been answered, you need to assess whether this business meets your investment goals and is within your personal margin of safety.
The term ‘margin of safety’ was coined by Benjamin Graham, the godfather of value investing. It is essentially to reduce the risk of losing money. Often, it is built into the price you are paying to acquire a business. The margin of safety is commonly driven by the following factors:
It’s time to start developing your offer if your core investment criteria are met by a business of interest.
Three core components should be top of mind as you’re starting to put together your preliminary offer.
Execution risk is the largest risk in acquiring any business.
Let’s delve into how the buyers can minimize that risk:
You need to be confident with your business model and ensure that you’re the right person to grow the company or you must have the right people on board to execute your business plan successfully. That is the best way to make the business equation work.
The easiest way to get a company is by agreeing to overpay the seller. Sometimes, it is worth paying that extra money because the business is worth that offering price or you might get some additional things like working or intangible capital. The important point is that you pay what the business is worth to you and what amount makes sense for the overall goals of the transaction. At the end of the day, your offer needs to be anchored in financial analysis ensuring that the price you’re paying will support your future goals.
Another way to minimize risk is by using seller financing often referred to as a seller note. A seller note is when the seller agrees to finance a portion of or the entire acquisition in a series of debt payments. A second technique, referred to as a holdback, is where the buyer will withhold a portion of payment until some post-closing condition is met.
There is a school of real-estate thinking that believes buyers should pay the least possible price when purchasing a business.
However, this thinking does not work in business, and the top business practitioners believe in paying for “quality”. Buyers are recommended to find a business with as little intrinsic risk as possible and pay a fair price.
Are you planning on buying a business in the next 12 months? Consider applying today to the Acquisition Lab, our do-it-with-you buy-side advisory service. You’ll gain access to world-class education, support from our team of experienced advisors, a suite of tools, and a vetted community to help you succeed in that first acquisition or in implementing a grow-through-acquisition strategy.
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