Growing your company through acquisition isn’t a sudden process. Rather, business acquisition requires a highly structured and detailed series of actions.

Acquisition typically takes six months to a year from the date of going to market to closing. Before all parties sign on the dotted line, the buyer and seller must agree on all aspects of the transaction, which may require lengthy negotiations.

“The new and the old business owner need to get along to make this work. They need to be compatible,” says Mike Demerath, an attorney at Hager, Dewick & Zuengler, S.C. in Green Bay, Wisconsin. “Otherwise, a smooth transition may be difficult to achieve. If there’s a lot of back-and-forth and digging in heels as a part of the initial negotiation of the contract, that is a concern on the buyer’s side. If things get adversarial, it’s not a good sign. It may be best for both sides to move on.”

Some sellers have a hard time stepping aside, and it’s easier to sell when they like the buyer who’s taking over, Demerath says.

“It needs to be a good relationship, not just in negotiating to reach a resolution but in the day-to-day after closing,” he says.

Trust and transparency are keys to a smooth transaction, says John Kelly, principal mergers and acquisitions adviser at Kelly Business Advisors.

“Trust is what gets a transaction through the finish line,” he says. “If you feel like trust is building, you are likely to get across the finish line. If trust is eroding, call it what it is and walk away. Without trust, it gets ugly.”

TAKING ON LIABILITIES

Most businesses sold today are asset sales versus entity sales. Buyers prefer an asset sale because they don’t take on the seller’s liabilities. In the purchasing agreement, buyers should establish what liabilities they’re taking over, if any. Buyers can accept only the liabilities they want, such as customer contracts, vendor agreements, orders, current jobs and leases.

“Make sure titles to assets are free and clear,” Demerath says. “Check if there are any liens, and make sure they’re paid at the time of closing.”

Liens are only one of the details to check during a due diligence period in which the buyer gets access to the seller’s business operations, facilities, equipment and financial records. Buyers shouldn’t only rely on what the seller is telling them. Instead, they should validate the details themselves or through a third party like an accountant (for financial statements) and a title company (for real estate).

“Make sure what you think you’re purchasing is what you do purchase,” Demerath says.

Dig into the business to determine if any issues are pending like litigation or environmental hazards.

“You don’t want to buy a business that is having issues that hurt its reputation,” he says.

Also determine if the company is as profitable as advertised.

“Make sure you’re buying a good business, a business that’s making good money,” Kelly says. “It’s very hard to turn around a business that’s not making any money unless, perhaps, you are an expert in that industry.”

Equipment is another important component of a transaction. Buyers should inspect the equipment to determine its age and condition, so they know what investment might be necessary to repair or replace equipment and still sustain and grow the business.

EMPLOYEE CONSIDERATIONS

Employees are a huge element to consider in a business acquisition. Due to today’s labor shortage, companies are buying businesses for the employees as much as anything else. Buyers should determine if key employees plan to remain with the company. To do so, they should structure a purchase contract with a condition allowing them to talk with key employees before closing and potentially reach an agreement with them to stay with the organization.

“The seller may have stay agreements in place with key employees, giving buyers confidence that the key employees will remain with the company,” says Kelly.

“Part of a meeting with the key employees is to get a sense if you’re going to mesh with them,” Demerath says. “If the key employees don’t like the buyer, they might leave and compete against the business, and that can become a serious concern for the buyer.”

To prevent this scenario, buyers should draft a noncompete agreement for employees. A noncompete is especially important if the owner isn’t involved in the business much and the key employees are running operations and meeting with customers. Buyers will also want to draft a noncompete agreement for the outgoing business owner and negotiate terms for them to assist with the transition to new ownership. They may become a consultant for a period of time or stay on as an employee. Kelly recommends a tapered schedule for the transition.

“If you need the seller around, for the first 30 to 60 days, it’s all hands on deck,” he says.

However, after the first 30 days, the seller should work on transitional items and not everyday operational tasks. After the first 30 to 60 days, assuming the seller wants to transition out of the business, the seller should work up to 20 hours a week. After 90 days, the seller should work up to 10 hours a week.

“Have the seller take off one out of every four weeks to allow for the transition of roles, duties and responsibilities,” Kelly says. “Make sure the seller doesn’t feel trapped in the business after closing.”

The purchase agreement should include the seller’s compensation and work schedule — and maybe health insurance coverage, too. If the seller is staying long term, having a salary and bonus plan makes sense. If the seller is only staying for the transition, paying the seller hourly allows both the buyer and seller to avoid an awkward conversation down the road about compensation. The truth of the matter is that a seller and the seller’s family members working in a business typically do not stick around as long as they plan to.

OTHER FACTORS

When analyzing a business to purchase, buyers should look closely at the owner’s role.

“Ideally the owner isn’t doing much,” Kelly says.

If the seller is working a lot of hours, the buyer may need to step in to run the business or hire a manager to replace the owner. These scenarios need to be considered prior to acquisition. Facilities matter, also. Depending on the circumstances, buyers may or may not want the seller’s facility. The status of real estate and property leases are important to research during the due diligence period.

Buyers should also review contracts and permits the seller has in place with government agencies, vendors and customers. Whether these are formal agreements or handshake promises, Demerath recommends asking two questions:

1. Can the buyer take over these contracts?

2. How long post-closing are the contracts locked in?

Lastly, buyers should consult with a lender to secure financing that fits their needs and minimizes risk. They might consider seller financing, in which the buyer pays the seller monthly, or an earn-out, in which the seller receives a percentage of new business generated or based on another performance metric. These are just two of the many ways to finance a business acquisition.

“There’s a million ways to structure these deals. If you get to a million, there’s a million more,” Kelly says.

Although every transaction looks different, the goal of a successful acquisition is to purchase a company with a strong foundation, fluent operations, the right employees, a loyal customer base and steady revenue. Entrepreneurs and business owners have an advantage when they purchase a company instead of opening a startup. They take ownership of a company that is already well-established and making a profit, whereas it takes months or years to establish a business from scratch that performs at the level of the business they are acquiring. But before buying an existing business, it pays to do research to make certain the transaction will work for all parties involved.