7 Steps to Buying a Business

Buying a business can be an exciting and strategic opportunity for ambitious entrepreneurs. Whether you're looking to expand your business portfolio, seize new market opportunities or reach an entrepreneurial goal, the buyout process is a practical route to achieving your goals.

However, the process should not be undertaken lightly. To succeed, you’ll need to understand every step involved, from the initial search to the signing of the deed of sale.

In this article, our business accountants offer a detailed explanation of the different phases involved in buying a business. Whether you're a seasoned entrepreneur looking for new opportunities or you're considering your very first acquisition, follow this comprehensive guide to discover how to successfully buy a business and maximize your chances of success.

Step 1: Preparation and research

Before plunging into the process of buying a company, take the time to prepare yourself. A methodic approach will allow you to lay a solid foundation from which you can make good decisions that are aligned with your objectives.

Identify personal motives and goals

Before you even start looking for a company to buy, take the time to think about your underlying motives. Why do you want to make this acquisition? Is it to expand your business, enter new markets, or are you motivated by a personal passion? Understanding your motives will help you stay on track throughout the process, and make choices that align with your values and goals.

Define search criteria

Once you've clarified your motives, draw up a clear list of criteria that your target company must meet. Consider business sector, company size, geographical location, financial performance, and more.

Use of professional networks, classified ads and search platforms

To find buyout opportunities, tap into your professional network. Tell your contacts, colleagues and mentors that you are looking to acquire a company. Personal recommendations can often lead to hidden opportunities. At the same time, keep an eye out for divestment announcements in your sector of interest. In addition, search platforms specializing in business sales can help you discover relevant opportunities.

Step 2: Letter of intent and negotiations

Once you've identified a company that matches your criteria and piques your interest, the next step is to begin formal discussions with the seller.

The letter of intent (LOI)

A letter of intent (or LOI) is a preliminary document that expresses your intention to acquire the company and defines the general terms of the transaction. Although not legally binding, the LOI establishes an initial framework for future negotiations. It enables both parties to agree on the main terms of the transaction:

• Price and terms of payment: Indicate the amount you are offering for the business and explain how payment will be made (in cash, shares or by other means).
• Conditions: Specify any conditions that must be met before the transaction can be finalized. This may include obtaining financing, completing due diligence, or other important factors.
• Exclusivity: The letter of intent may also include an exclusivity clause that prevents the seller from pursuing negotiations with other buyers for a specified period of time.
• Confidentiality: Make sure the seller keeps the details of the transaction and any information shared during negotiations confidential.

In addition to giving structure to the transaction, the letter of intent also strengthens the relationship between buyer and seller by serving as tangible proof of a serious commitment.

Step 3: Evaluation of the company

When you're thinking of buying a business, make sure you evaluate it thoroughly. An in-depth analysis will allow you to determine the company’s true value, and to make decisions about whether or not to go ahead with the deal.

Gathering information

Gathering relevant information on the company is the starting point of the evaluation. This will involve gathering financial, operational, commercial, legal and other essential data.

The difference between diagnosis, assessment and audit

These three important terms are sometimes used interchangeably, but refer to very different steps in the assessment of a business:

• Diagnosis involves gathering information to understand the company's current overall condition.
• Valuation, on the other hand, aims to determine the company's financial value, taking into account elements such as assets, liabilities, cash flow and future potential.
• A financial audit, on the other hand, is a more in-depth, formal examination of accounting and financial information, often carried out by tax accountants.

Consideration of financial, human and legal aspects

A comprehensive valuation is not limited to financial aspects alone. When valuating a business, you also need to consider human and legal factors.

Financial elements include past performance, financial projections, assets and liabilities. Human factors include the management team, staff skills, corporate culture and management strategy.

From a legal point of view, you need to examine contracts, potential litigation, intellectual property and other legal issues.

Step 4: Due diligence checklist

Due diligence is a major step in the process of acquiring a company. It consists of a series of meticulous examinations and analyses designed to thoroughly evaluate all aspects of the company.

This critical step enables potential buyers to make objective decisions while ensuring the accuracy of the information provided by the seller, and identifying any risks associated with the transaction.

Definition of due diligence

Due diligence is an in-depth investigation aimed at validating the accuracy of the information provided by the seller of the business. The goal is to bring to light all relevant details, whether positive or negative. In other words, due diligence allows buyers to dig deep to ensure that they fully understand the reality of the business they are considering acquiring.

Key areas to examine: financces, taxation, cash flow, assets, liabilities, etc.

Due diligence involves the rigorous analysis of a variety of factors. Key areas for review include:

• Finances: Analysis of corporate financial statements, annual reports and cash flows to assess the company's financial health.
• Tax: Verification of business tax returns to ensure that the company is in compliance with tax obligations, and to anticipate any potential tax liabilities.
• Treasury: Review of cash flows, available liquidity and short-term financial obligations.
• Assets and liabilities: The valuation of tangible assets such as real estate, equipment and inventory, as well as liabilities such as debts and contractual obligations.
• Contracts and obligations: Analysis of key contracts, agreements with customers, suppliers and partners, as well as any pending lawsuits.
• Human resources: Review of employment contracts, benefits, human resources policies and any potential conflicts.
• Intellectual property: Assessment of intellectual property rights such as patents, trademarks and copyright.

Step 5: Choice of business structure

When it comes to buying a company, the way you purchase the business can differ depending on the business structure. Each type of business structure will involve distinct tax, financial and legal implications. Here's an overview of several common situations:

Purchase of a business

Directly buying a business involves acquiring the tangible and intangible elements that make up the company's commercial or industrial activity. This can include tangible assets such as furniture and merchandise, as well as intangible assets such as customer base and trade name. It is common to acquire all assets when the target company is a sole proprietorship.

Acquisition of shares

The buyer will acquire full control of the target company by becoming the majority shareholder. This is a common option for corporations, and may have specific tax implications depending on the jurisdiction and laws in force.

Buyout by a holding company

Setting up a holding company can be a strategic option for buying a company. A holding company holds shares in other companies, known as subsidiaries. By using a holding company, the buyer can structure the acquisition in a way that optimizes financial and tax management, while benefiting from certain tax advantages.

Impact of business structure on taxation and financial implications

The choice of legal structure has a significant impact on a company's taxation and the financial aspects of the acquisition.

• Buying out a business: This arrangement can lead to a deduction for depreciation on the tangible elements acquired, which can reduce the buyer's tax burden. Tax laws may vary from jurisdiction to jurisdiction.
• Sale of securities: There may be specific tax benefits to selling securities in some jurisdictions, such as capital gains exemptions. However, the buyer also inherits the liabilities and obligations of the newly acquired company.
• Buyout through a holding company: By creating a holding company, the buyer can benefit from flexible management of financial flows and tax benefits linked to dividends and royalties between subsidiaries. However, the cost and effort involved in creating and managing a holding company are often high.

Step 6: Final negotiations

After conducting due diligence and valuing the target company, the transaction is completed via the final negotiation phase. This stage involves consolidating agreement details, formalizing agreements and preparing for the transition of company ownership.

Finalizing details of the agreement

Once preliminary steps have been completed, it’s time to focus on clarifying and finalizing all aspects of the agreement. This includes precisely defining the terms and conditions of the transaction, including purchase price, terms of payment, warranty clauses, the duration of the non-competition clause and other specifics.

Role of the memorandum of understanding

The memorandum of understanding is an essential document in the final negotiation process. It serves as the basis for formalizing the agreement and setting out the mutual commitments of all parties. A memorandum of understanding describes the key elements of a transaction in detail, including payment terms, guarantees, confidentiality obligations, and any other special conditions.

Signature of the final deed of sale

Once the memorandum of understanding has been finalized and all the preconditions have been met, the parties sign the final deed of sale. This deed officially transfers ownership of the target company from the former owner to the buyer. The deed of sale must be drawn up by legal experts to guarantee its validity and compliance with current legislation.

Completion of legal formalities

Once the deed of sale has been signed, several legal formalities must be completed to formalize the change of ownership. These may include registering the deed with the relevant authorities, and completing other administrative tasks to ensure that the target company is legally transferred to the buyer.

Transition and integration

Once the sale has been completed, the transition and integration phase begins. The buyer gradually takes over operational control of the target company. It is important to establish clear communication with employees, impose a smooth transition plan and guarantee business continuity.

Step 7. The first 100 days after the takeover

The first 100 days following a successful buyout and transition of ownership mark a crucial period for the buyer. Now is the period of taking charge of company management, implementing their vision and ensuring the ongoing success of the operation.

Transition of management

Establishing a smooth management transition should be a priority. New managers need to establish their presence, familiarize themselves with day-to-day operations, and build relationships with employees.

Planning and implementation

The development of a strategic business plan to cover the first 100 days is essential. This plan should detail the specific objectives and actions to be taken to align the business with the buyer's vision and objectives. This may include operational adjustments, necessary investments, and growth initiatives.

Communication with employees

Transparent communication with employees helps to build trust and gain buy-in. New managers need to share their vision, explain the changes to come, and respond to employees' questions and concerns following the takeover.

Setting up monitoring mechanisms

Establishing monitoring and reporting mechanisms makes it possible to assess progress and identify potential challenges. This can include the implementation of performance dashboards, regular follow-up meetings and the creation of progress reports.

Co-management

In some cases, a period of co-management with the previous owner may be recommended. This can help transfer knowledge and ensure a smooth transition. However, roles and responsibilities need to be clearly defined to avoid conflict and confusion.

Get support when buying a company

The process of buying a business is complex, but it can nonetheless be a highly rewarding adventure. Remember, a successful buyout demands careful preparation, rigorous valuation and skillful execution.

At T2inc, we understand the challenges and opportunities involved in taking over a business. Whether you're in search of the perfect business, looking for ways to finance your buyout, or aiming to maximize the value of your acquisition, we're here to answer your questions.

Contact us today to learn how T2inc can be the ideal partner to help you succeed in buying and running a business.