5 Questions Businesses Must Ask Before Completing an Acquisition

Acquiring an existing business could be a shortcut to increased profits. Unlike building a business from the ground up, buying one allows you to bypass typical start-up challenges, such as cash flow and market presence. Plus, you could scale your primary business or lower financial risk by acquiring another business.

So, when you come across an opportunity that sounds like a good fit financially and where the cultures of your company and another entity will match well, you're inclined to act fast.

Despite the advantages of purchasing a fully-staffed, lucrative business with a loyal customer base, it's wise to slow down. Besides consulting with legal and financial professionals, ask yourself these questions before inking the deal. It could save you time, money, and aggravation.

How much am I willing to invest upfront?

The amount of cash or financing you have available to buy an existing business will naturally limit your purchase options. Once you've identified the business types, products or service offerings, and brands that fit your budget, you'll be in a better position to choose acquisition options that match your long-term goals.

Can I speak with the current owner?

Gaining answers to a few key questions can shine the light on factors that may not be of concern to the current owner — but could be for you. Answers to questions like, "Why are you selling?" and "How many hours do you work each week?" are more personal and less likely to be clearly spelled out in legal or financial documents. Keep in mind that some businesses will require you to sign a confidentiality agreement before you speak with the owner. By talking directly with the current owner and other employees of a business you are looking to acquire, you can gain additional insight into that company's culture and ask pertinent questions that will allow you to determine whether it will mesh well with your own company's culture.

Is the business financially healthy?

It's wise to consult a financial professional for a thorough explanation of a business's financial health. They can help you assess the company's capitalized earning approach, cash flow methods, and balance sheet. There are other aspects you can review on your own as well, that could help you decide whether an acquisition is worth pursuing. For example, ask questions about inventory levels, equipment contracts, and vendor relationships. The answers may reveal a weak financial infrastructure.

What regulatory approvals do I need to maintain?

Most businesses have to maintain some type of licenses, permits, or other authorizations that allow them to operate legally, and some can be jurisdiction-specific. Depending on the industry, the business might be limited by specific zoning requirements or environmental regulations. Violations, even unintentional ones, could lead to hefty fines or business closure.

This information is crucial to know upfront, especially if you intend to develop new products or expand existing locations. Learn about these early in the process, as they could reveal that owning a particular business carries more risk than you're willing to accept.

Where can I get professional assistance with the acquisition?

Purchasing an existing business should be done with the professional guidance of a qualified attorney and financial professional. An attorney can alert you to the potential risks of acquiring a particular company. A financial professional does more than estimate the return on investment. They can also help you evaluate the tax implications of acquiring the business. Additionally, these professionals can help you develop acquisition strategies as well as create and review critical documents to ensure the acquisition is a smooth one.

A substantial initial investment is typically needed to complete a business acquisition. Speak with one of our Commercial Bankers to explore financing options by contacting us at 866.770.3100 today!