For Searchers, buying a small business from a retiring baby boomer can be a strategic and profitable endeavor.
These “boring” SMBs—steady, established businesses that often fly under the radar—can provide reliable cash flow and growth potential.
Below is overview on the major process steps to think through before acquiring such a businesses.
1. Define Your Acquisition Criteria
Before diving into the market, establish clear criteria for your acquisition. Consider the following factors:
Industry: Focus on industries you understand or have an interest in
Location: Determine if you prefer local businesses or are open to other regions.
Financial Metrics: Set benchmarks for revenue, profit margins, and cash flow.
Size: Decide on the size of the business in terms of employees and annual turnover.
2. Identify Potential Businesses
Finding the right business to acquire involves extensive research. Here are some effective ways to identify potential targets:
Business-for-Sale Marketplaces: Websites like BizBuySell and BizQuest list numerous businesses for sale.
Business Brokers: Brokers specialize in connecting buyers with sellers and can provide valuable insights and opportunities.
Networking: Leverage your professional network to uncover potential leads.
Direct Outreach: Consider contacting business owners directly, expressing your interest in acquiring their business.
3. Conduct Preliminary Due Diligence
Once you’ve identified potential targets, conduct preliminary due diligence to evaluate their viability. This involves:
Financial Overview: Review basic financial statements (income statements, balance sheets, cash flow statements) to ensure the business is profitable.
Market Position: Understand the business’s position in the market, its competitive landscape, and growth potential.
Reputation: Check the business’s reputation among customers and suppliers.
4. Evaluate Financials and Operations
Deep-dive into the financial health and operational efficiency of the business:
Financial Analysis: Examine detailed financial records for the past three to five years. Look for consistent revenue, stable cash flow, and manageable debt levels.
Operational Assessment: Evaluate the day-to-day operations, including key processes, employee structure, and customer base. Ensure there are no hidden operational issues.
5. Determine the Business Valuation
Accurate valuation is crucial for making an informed offer. Use multiple valuation methods:
Earnings Multiple: Multiply the business’s earnings before interest, taxes, depreciation, and amortization (EBITDA) by a suitable multiple based on industry standards. In SMB specifically, Owners will use "SDE" - a metric that adds back Owner salary to EBITDA to represent cash available to the new Owner.
Discounted Cash Flow (DCF): Project future cash flows and discount them to present value.
Comparable Sales: Compare the business to similar businesses that have recently sold.
6. Secure Financing
Securing financing is often the most challenging part of the acquisition process. Consider the following options:
SBA Loans: The Small Business Administration offers favorable loan terms for business acquisitions.
Seller Financing: Negotiate with the seller to finance part of the purchase price.
Personal Funds: Use personal savings or raise funds from private investors.
7. Negotiate the Purchase Agreement
Effective negotiation is key to a successful acquisition. Focus on:
Purchase Price: Agree on a fair price based on your valuation.
Payment Terms: Negotiate favorable payment terms, including any seller financing arrangements.
Contingencies: Include contingencies that allow you to back out if due diligence uncovers significant issues.
8. Conduct Comprehensive Due Diligence
Before closing the deal, conduct thorough due diligence to uncover any potential risks:
Legal Review: Examine all legal documents, including contracts, leases, and intellectual property.
Tax Assessment: Ensure there are no outstanding tax liabilities or issues.
Operational Audit: Verify the accuracy of operational information provided by the seller.
9. Develop a Transition Plan
A smooth transition is vital for maintaining business continuity. Create a detailed plan that includes:
Employee Communication: Clearly communicate the transition to employees to alleviate concerns.
Operational Handover: Work closely with the retiring owner to transfer operational knowledge and responsibilities.
Customer and Supplier Relations: Ensure seamless continuity in customer service and supplier interactions.
10. Close the Deal
Finalize the acquisition by:
Signing the Purchase Agreement: Complete all legal documentation and finalize the purchase.
Transferring Funds: Ensure all financial transactions are completed as per the agreed terms.
Taking Ownership: Officially take control of the business and begin the transition process.
11. Post-Acquisition Integration
After closing the deal, focus on integrating and optimizing the business:
Implement Strategic Plans: Execute your strategic vision for growth and improvement.
Monitor Performance: Regularly review financial and operational performance to ensure the business is on track.
Build Relationships: Strengthen relationships with employees, customers, and suppliers to foster loyalty and support.
Conclusion
Buying a small business from a retiring boomer involves a series of strategic steps, from defining your acquisition criteria to post-acquisition integration.
There are a number of steps to take outside of this article during the process, but feel free to use the above article as a high-level guide.
At SMB PE, we specialize in identifying and acquiring solid, well-established small businesses. If you’re interested in learning more about our approach or discussing potential opportunities, please feel free to reach out.
Comments