1. 10 steps of an Acquisition Strategy
The processof buying a businesscan be narrowed down to one very
simple question: Is the businessyou’re buying actuallythebusiness
that you think you’re buying? Somepurchasesaremore
straightforwardthanothers. Often, thisis reflected in the type of
businessyou are purchasing. Ifyou have a thorough understanding
of thebusiness you are buying, then the processwill be
smoother. Businessesarecontinuallybought and sold as a result of
an opportunitybeing made availableor becauseof a strategic plan.
Larger corporationsbuybusinessesto takeout a competitor, increase
revenues, market shareor even purchasingpower. Theprocessof
buying a business – whether it’s a manufacturingcompany, Internet
Companyor accountingfirm –is the same. You’rebuying an
established businessthat’shopefully making moneyand has
customersand employees alreadyin place. You also know that if you
buy a good business, you have the opportunitytomakeit a better one.
Here’s Ten steps on how to build an acquisitionstrategy:
Step One: Defining the business you want to buy When
larger corporationsdothisthey call it ‘acquisitionprofiling’. For you,
it will probablymanifest itselfin a series of questionssuch as: Which

2. kind of business do I want to buy? How do I know which kind of
businessis right for me? Wheredo I start? Evenifyou alreadyknow
which businessis right for you it’sstill a good idea to do some
research. Read up on any futurelegislationthat mayaffect the
businesssector. Get asmuch informationabout thesector as you
can – and don’t be afraid tochangeyour mind. If you’re thinking
buying a company, ask yourself what makes one successful? Find an
exampleof a very successful business. Could you replicatethat? At
thisstageyou’ll also be considering how much to spend on buying a
business. Careful financialplanning is crucial, asyou don’t want to
overstretch yourself in the purchaseonly to find you have inadequate
resourcesto make any changesor implement new plans. Makesure
you build some slack intoyour budgets. Start doing thecalculations
now.
Step Two: Targeting the business Onceyou’ve defined the
parametersofthe business you to want buy – the market sector, size,
location, the pricerange, et cetera – you’ll be in a positionto start
targeting theright business. Therearetwo ways of targeting a
business: find one alreadylisted for sale, or approach a business not
for sale and make an offer. However, if the businessyou want to buy
is not activelybeing marketed for sale there is nothing to stop you
from approaching theowner directlyand making anoffer. Every
businesshas its price. Ifyou go down this routethen it might be
advisableto employ an intermediarytorepresent you. Thereare
many businessand accountancyfirmswhowill target anopportunity
on your behalf.
Step Three: Preliminary due diligence Now thingsaregetting
interesting. You’venarrowed down the opportunitiesand you’ve
created a shortlist of businessesthat interest you. Ideally, you will
have less thanfive targetsonyour list. Beforeyou engagelawyers
and accountantsand start theofficialdue diligenceprocessyou
should do your own quickversion of due diligence. Whatisdue
diligence? Well, it’s a technicalterm, used by accountantsand lawyers
to describetheprocess of making sure the businessis what it says it
is. Spending timeonchecking out the business could save you
heartachedownthe line. Once you’ve got your shortlist you should
get as much informationaspossibleabout each businesson your

3. list. Thisis your chanceto dig around and makesure the businessis
as good as it seems. If you’re buying a listed business for sale then it
should come with a sales memorandum giving anoverview of what is
being sold. Thisis a crucialstage. You must find out the truth about
the businessbeing sold. Any mistakes, flaws or irregularitiescould
also help you to negotiatethepriceor make your decisionto walk
awaymuch easier. You will want to get accessto financialrecords,
including audited and management accounts. For thisyou will be
asked to signa confidentialityagreement. Thisconfidentiality
agreement (which won’t be more thantwo or three of pages) is a
commitmentbyyou not to reveal sensitiveinformationtoa third
partyand is designed to makethe seller feel comfortableabout
sharing theknowledge of how his business is being run. Remember,
the businesswill still be operationaland no owner likes it to be known
by his employees, customersor competitorsthat hisbusinessis up for
sale. You will also want accessto informationabout existing
contracts, either with suppliersor employees. You will want to
research the local area and make sure thereare no legal issues that
might threatenyour activity. Themorecertainyou are about the
businessand the more evidenceyou cangather to backup your case,
the easier it will be to start negotiations. From your shortlist of up to
five you should be narrowing downto just one or two – the major
target and a backup.
9 Stepsto Follow in AcquisitionDue Dilligence
Step Four: negotiating the price Onceyou are satisfied that you
have done as much as possible to understand thebusiness you’re
targeting, you canstart to talkabout actuallybuying it. Inevitably this
will mean a conversationwith thebusiness owner or intermediary
about the priceof the business. It’simportant tonotethat at this
early stageof discussionsthepriceremainssubject tocontract. This
meansyou canmake an indicativeoffer that can changeat some
futurepoint. Betweennow and when the contract isdrawnup you
may discover some informationabout thebusinessthat will affect
your perceived value of it, and you maywish to negotiatefurther on
the price. Sofeel free to talk about what you are willing to pay at this
stage, safe in the knowledge that it won’t be binding after further
investigation. Ofcourse, it might transpirethat thebusinessis

4. actuallyundervalued, and that you have scored a hit. Inthiscase,
you mayjust want to pay the asking price. Also, at thisstageand
throughout theprocess, don’t allow yourself to be rushed. Don’t be
pushed intoa quicksale; takeyour time. Onceyou makean
indicativeoffer a businessowner or intermediarymaywant torush
thingsthrough. That’sonly natural. However, resist them.
Remember, as a buyer, you hold most of the cards. Takeasmuch
timeas you need to get to the bottom of what it is you are buying.
Don’t let them force a timetableon you that you feel uncomfortable
with.
Step Five: Business Valuation A priceistheultimatereflection
of thevalue of the business. Thereare many valuationmethodsused
to assess a business. Manycompaniesusea multipleof earningsas
a good starting point. Asa generalrule you cantake a multipleof
futureprofitsto land on a price. Themajorityofbusinesses sold are
done so on a multipleof betweenthree and ten timesthe profit or
EBITDA. I have seen even moresimple calculationsof1 X
revenues. Thereare companiesthat specializeinvaluing certain
types of businessesand some companiesor individualsengagethe
services of an accountant with experienceinbuying and selling
businesses when making anassessment. However, in the final
analysis, a business is ultimatelyworth what you’re willing to payfor
it.
Step Six: Heads of Terms Agreement TheHeadsof Terms
Agreement (also known as Letter of Intent or Memoranda of
Understanding) isto prevent misunderstandingsbetweenthebuyer
and seller when it comes to completing a deal. Thinkof it as a
roadmap that outlineshow the sale will take place. It’s not the
contract of sale – that comeslater. Essentiallyit’s a document of
terms, mattersthat you’ve both agreed on. For example, it will
includea period of exclusivitythat will prevent the vendor from
talking to another prospectivebuyer. And it will protect theseller by
preventing you from revealing informationabout thebusinessto
third parties. Importantly, thedocument gives you the right to
recover costsif the seller suddenly decidesto pull out of the
deal. Theheads of agreement areonly partiallylegally binding. For
example, the exclusivityperiod or confidentialitytermsdiscussed

5. above arelegally binding, but thepriceof the business, the
completiondateor whether you actuallyhave to completethedeal are
not. You canstill walk away, even if you’ve signed the heads of
agreement. Seethe heads of agreement aslaying down the foundation
of thedeal, setting theparameters. Theyaredesigned to give comfort
to both the buyer and seller.
Step Seven: Due Diligence Thisisthe officialdue diligence
undertaken by professionalsto ensure everything is as it should be. It
may includecommercialdue diligenceto assess the businessitself,
legal due diligenceto look at the contractsofthe business, and
financialdue diligenceto assess the tax position. Thebasic principle
of due diligenceremainsthesame: to ensure the buyer is 100% sure
of thebusiness they are buying.
Step Eight: sale and purchase agreement Thislegaldocument
will containthe termsand conditionsof theacquisitionand the rights
and obligationsofthe partiesinvolved. Apart from establishing the
priceand how and when thepurchasewill be financed, the sale and
purchaseagreement willalso containmore detailed clauses. For
example, you may put in a restrictivecovenant preventing theseller
from setting up a new business that will directlycompetewith you.
Step Nine: paying for the business Therearemanyways you
canstructurehow you pay for a business. The simplest way is to pay
on completion. Alternatively, you candefer the consideration, the
legal term for payment. Thisinvolves holding backsome of the
payment untila certainevent or milestoneis hit. Somecompanies
will also build a “buy-out or earn-out” to motivatesellers to remain
with the companyand achievepredetermined goals. Theseller will
wish to have some securitybuilt intoan agreement giving him or her
an equitablestakeinthe business, should you fail to meet payments
or if the venture fails. Thisis a very commonway of buying a business
in the US – usually called ‘loan notes’ or ‘vendor financing’.
Step Ten: completion Allthedocumentsare signed and the
businessis now yours. It cantakemany monthsto go through this
10-step process, but it’s worth being patient and thorough – because
the stakescan be incredibly high. Throughout theprocessyou should

6. always be prepared towalk away, however expensiveor painful it
might beto do so, the painand expense will pale into comparison
with going ahead and buying the wrong business. It could be the
costliest mistakeyou’ll ever make.
Did I miss anything? I would welcome your commentsand thoughts
on thistopic.
To Greater Success, ChrisBartholomew Founder& CEO 4X Inc.