How to go about buying a business is a wide question, and the right approach and answer will depend on a number of factors, including your business type, experience of deal-doing, and appetite for risk.
Acquiring a business, whether as a free-standing entity or to bring it into your existing business, tends to involve a number of key (and perhaps obvious) steps, including:
- Form a clear view of the strategic rationale behind the type of business you will target
- Apply criteria based on the above to identify potential target businesses which are of the appropriate industry type / size / profitability / location etc
- Decide on appropriate deal structure, compose an offer within an appropriate structure, and negotiate/agree headline deal terms with sellers
- Identify your funding requirements and solutions to these
- Execute the transaction
Acquisition structures and deal process
Deals come in many shapes and sizes, and a full walk-through the range of structures is outside the scope of this note. That said, the majority of acquisition deals fall into 2 basic categories – an acquisition of the assets of the target business from the company that owns those assets, or an acquisition of the shares of the target business from its existing shareholders.
There are a number of key differences, as well as a number of similarities, between an asset deal and a share deal – the risk profile and tax treatment of the transaction are perhaps the most notable differentiator. But in either case the broad approach to the deal will tend to follow a similar pattern:
- Agree headline terms and record these in offer letter or heads of terms
- Undertake a Q&A process of ‘due diligence’ investigation into the target business
- Document the terms of the deal and allocate risk within the scope of these legal documents
Where to start and how to get it done
Regardless of a buyer’s experience levels, a deal tends to sap significant management time, and can be a frustratingly slow process unless highly organised and driven in a proactive way by the parties and their advisors. Key to achieving this is compiling your deal team as early as possible.
The composition of that team depends on the circumstances – but will likely require a number of key management personnel from your business as well as external advisors. Those external advisors may well include some or all of the following:
- Corporate finance advisor – whose role varies from deal to deal but may extend to identifying a target business and helping to broker a deal and source funding;
- Corporate lawyer – who will advise on deal structure and will negotiate and execute the deal and any associated funding documentation;
- Accounting and tax support – sometimes a function provided by the corporate finance advisor, your accountants and tax advisors will input into structure and will (alongside the lawyers) manage the due diligence process and advise on optimal deal structures to mitigate any identified risks.
