Business Acquisition: A Guide for Your First Deal

Start with why you are buying

Define what you want the purchase to deliver: customers, location, equipment, talent or a new product line.

Buyers who know what they want waste less time. Write down your criteria: industry, size, location, price range, owner involvement and the skills you bring. A business that fits your abilities is safer than one that merely looks cheap.

Learn the basic deal types in types of acquisitions, including asset purchases and stock purchases.

Find and screen targets

Targets come from listings, industry contacts, owners nearing retirement and direct outreach. Screen quickly on size, earnings and fit.

Start with places to look for a small business and finding a small business for sale. Ask for a short summary first, then sign a confidentiality agreement to see more. Ask why the owner is selling and what happens to key customers after the sale.

Value the business

Value usually rests on earnings, assets and growth prospects. Methods include multiples of earnings, asset values and discounted cash flow.

Small businesses are often priced as a multiple of adjusted earnings, where adjustments remove one-time costs and the owner's personal expenses. Multiples vary by industry and risk, so check comparable sales with a professional.

Illustrative example: adjusted earnings of $150,000 and a multiple of 3 imply a price near $450,000. A change in the multiple moves the price a lot, which is why the earnings figure must be verified. Read business valuation methods and determining market value.

Do your due diligence

Verify financials, taxes, contracts, customers, employees, assets, liabilities and legal issues before you commit.

• Three years of tax returns and financial statements, matched to bank statements
• Customer concentration and contract terms
• Debts, liens and pending claims
• Lease terms and licenses that transfer
• Employee roles, pay and key-person risk
• Condition of equipment and inventory

Hire an accountant and an attorney with deal experience. Their fees are small compared with a bad deal.

Structure the deal and the financing

Deals often mix a down payment, seller financing and a loan. Structure payments to match the cash the business actually produces.

Seller notes keep the owner invested in your success. Earnouts tie part of the price to future results. SBA loans are a common route for acquisitions, with lower cost and longer terms but a slower process. See how to buy a business with an SBA loan and financing the purchase of a competitor.

Test your debt service against the business's real earnings, using the debt service coverage ratio.

Plan the first 100 days after closing

Keep customers and employees calm, learn the operations before changing them and watch cash closely.

The weeks after closing are risky. Meet key employees and top customers early, explain what is staying the same and listen. Do not change pricing, staff or systems in the first weeks unless something is broken.

Watch cash daily at first. Transition costs, customer slowdowns and seller payments can squeeze liquidity. Build a 13-week cash forecast and update it weekly.

Set a few targets for the first 100 days: retain the top customers, document processes, review contracts and decide which improvements will pay back fastest. If the seller agreed to a transition period, use it to learn what is not written down.

Where ROI Funder fits

ROI Funder does not place acquisition loans, but it can fund working capital and equipment for a business you already run.

If you are buying a business, the main purchase financing will come from an SBA lender, a bank, the seller or investors. ROI Funder does not place acquisition loans. After closing, you may need cash for payroll, inventory or new equipment, and an established business with 6+ months of history, $20,000+ monthly revenue and 500+ FICO can look at working capital or equipment financing. See also the explainer on acquisition loans.