The new CEDA guidelines stipulate that the Agency can finance acquisition of both local and foreign owned businesses as going concerns. The main determinant of funding is viability and sustainability. A thorough assessment of the business which is a subject of acquisition, and the incoming management, is a prerequisite.
Types of Acquisitions
Economists classify acquisitions into four groups: horizontal, vertical, congeneric, and conglomerate.
Horizontal acquisition
Occurs when one firm combines with another in its same line of business, for example, when one widget manufacturer acquires another.
Vertical acquisition
An example of a vertical acquisition is a steel producer's acquisition of one of it's own suppliers such as an iron or coal mining firm.
Congeneric (means "allied in nature or action") Acquisition
A congeneric acquisition involves related enterprises but not producers of the same product (horizontal) or firms in a producer-supplier relationship (vertical).
Conglomerate Acquisition
A conglomerate acquisition occurs when unrelated enterprises combine.
In theory, acquisition analysis can be simple, but it can also be very complex. In any one year, very few of the many people trying to buy a business are successful in actually buying one. The steps in acquiring a business are far from easy.
Most potential buyers spend a large amount of time looking at potential acquisitions. However, most simply fail to go through the acquisition process correctly. Most have never made a single acquisition before.
The eight basic steps in acquiring a business are:
Criteria: Decide on the criteria for your acquisition. For example, your criteria may include: geographical restrictions, type of business, sales, profitability, and personnel. Of course, the amount of the available down payment and your own personal financial strength are also importantly taken into considerations.
Finding a business: This step can be the most difficult because there is no all-inclusive list of businesses for sale like there is in the real estate industry. In addition, many business owners that wish to sell their business tell no one except their closest advisors.
Preliminary review and Pre-Due Diligence: The goal of the preliminary review and Pre-Due Diligence is to identify deal-breaking issues before very much time and expenses are committed. Examples of issues that would cause you to abandon a potential acquisition candidate are: material misstatements in the financial statements, or uncertainty regarding customer or employee retention. You should have a reasonable level of comfort that the potential acquisition candidates fit your criteria and have a reasonable chance of being acquired successfully.
Valuation: There are several approaches to valuing a business and no one approach is always right or wrong. One way is using the Sellers Discretionary Cash Flow (SDCF). This approach indicates how much benefit the business owner is realizing through profit, salary, depreciation, interest expense, and perks. For the most part, the SDCF after an acquisition should exceed the required debt payments and minimum owner's compensation. You should work with your advisor to have realistic objectives as to price and terms.
Negotiation: Negotiations will occur with the Letter of Intent and the Purchase Contract. In the Letter of Intent, the basic terms of the acquisition are worked out. After the Due-Diligence phase, the final terms are agreed upon.
Due-Diligence: Due-Diligence is a detailed investigation of all the issues that need to be addressed before four simple questions can be answered. The questions are: Should I make this acquisition? How much should I pay for the business? How should the acquisition be structured? How should I deal with any post-acquisition operating, accounting, and legal issues?
Financing: There are dozens of sources for financing. One of the most common source is having the seller finance part of the acquisition price. Each source has their own niche as to the type of financing, industry preferences, collateral requirements, terms, and geographical preferences.
Closing: This can be the easiest step as everyone signs the closing papers, or it can be the most frustrating step as everything falls apart at the last minute because one of the first seven steps was not done properly.
A common mistake is trying to make an acquisition without professional help. If you have never acquired a business before, do not use the process as on-the-job training.Successfully acquiring a business is hard work, but you can do it.
