Developing a business plan specific for a business acquisition is somewhat different than for a new company that is looking to establish its operations. This is primarily due to the fact that the development of the business plan for acquisition needs to clearly showcase the prior operations of the company so that a bank or investor can make a decision as to whether or not to provide financing for this type of business. One of the commonalities among business plan specific for acquisitions is that there is a significant portion of the plan dedicated to the six months to twelve month transition period in which the new owner needs to properly transition the ownership of the business.
Usually, there is a thorough discussion regarding how the previous owner will work with the new owner in regards to meeting important clients, familiarizing themselves with the day-to-day operations of the business, getting to know all the employees that will stay on, and understanding the operations and procedures that are used in conjunction with the existing operations of the business. The existing owner may also assist the new owner in regards to expanding the company. It is not uncommon for an existing owner to stay on as a consultant was a part-time employee during the transition process. This is especially true for very complicated businesses or professional service companies. For instance, a entrepreneur that acquires an existing accounting firm may have the existing owner stay on staff for a year while all clients are properly transitioned to the new owner. For anyone that is thinking of selling a business, it is important to note that there may need to be a clause that includes time as a consultant for the business. Nearly all business acquisitions also have a non-compete contract which ensures that the existing owner will not establish a similar business within a certain timeframe so that the new owner can properly develop and expand the operations of the business. This is especially true among professional service practices where the owner has established very strong relationships with individual clients and will not try to take them to any new business that they start.
One of the other commonalities it is for businesses that are undergoing acquisition is at the financial model showcases both the existing operations of the business and have the new entrepreneur intends to expand operations over a three year to five year timeframe. In this business plan, usually two years of prior financials are showcased so that the financial institution can understand what the current operations can support in terms of a debt obligation. Of course, any financial institution or private investor is also going to understand exactly how the entrepreneur intends to expand the business once the transition period is over. Common ways that are discussed in the business plan in regards to business expansion include increasing the marketing budget, potentially acquiring additional companies that can be used to expand through acquisition on an ongoing basis, as well as providing new and innovative services and products that will boost the business organically.
Most entrepreneurs, beyond making a capital contribution necessary to acquire the business will also provide a significant amount of capital in regards to expansion purposes. Often, when a business is acquired two types of credit are usually used for the process. First, a business loan is used to acquire the company outright or its assets from its existing owner. A working capital line of credit is usually also required in order to have funds available for the expansion of the business. It can be expected that it entrepreneur will be required to put down a 10% to 20% down payment for the acquisition of an existing company. This may be subject to a little bit of fluctuation based on whether or not real estate is involved in a transaction where there is a significant amount of furniture, fixtures, property, and equipment. One of the nice things about acquiring a business that is already in operation and profitable is that it can be used as a springboard for rapid expansion. It is very difficult to establish a new company, and as such – many entrepreneurs take to acquiring businesses so that they can have a running head start as relates to their business operations. This is especially true for individuals that have professional licensure and can acquire an existing practice or similar business so they can immediately begin practicing at 100% capacity.
One of the key things when acquiring a existing business is to ensure that the entrepreneur has a certified public accountant and attorney on retainer. As there are a number of tax considerations to deal with when acquiring a new business, it is imperative that the owner work with the certified public accountant in order to have cost basis determined. Additionally, the entrepreneur’s attorney can assist with dressing thing all the necessary paperwork as it relates to acquiring the business and ensuring that there is a non-compete clause between the entrepreneur and the existing owner. While these professionals are expensive, they can provide a substantial amount of advice and counsel as it relates to properly undertaking a large-scale business acquisition.
Beyond the business plan, any entrepreneur that is looking to acquire an existing business will usually be asked to provide two years of tax returns from the existing company. This ensures that the business is generating the income that is stated by the current owner and that the business will be able to sustain any debt undertaken during the acquisition. The existing owner may be required to certify any of these financial statements so that a bank can properly rely on them when rendering an investment or lending decision. There are also a host of other documents that are going to be required by any financial situation that is entertaining a loan offer. Again, a certified public accountant can be an invaluable resource during this time they will be able to effectively guide both the entrepreneur and the existing owner as to what needs to be done when going through this process. It should also be noted that at times a formal valuation by a certified business valuation expert may be required by the bank as well. Typically, for a small business the cost associated with having this type of evaluation done runs anywhere from $1,000 to $5,000. This professional will examine each asset owned by the company and provide its approximate fair market valuation so that the entrepreneur understands that they’re not paying more than they should for any type of existing business entity. In almost all cases where there is real estate involved a qualified appraiser is going to be required as well.
In closing, a business plan that is specific for a business acquisition is a much more complex document than that of a startup company. However, banks and lenders are far more keen to provide a loan to an entrepreneur that is looking to acquire an existing business in the highly economic stability of these companies. The longer the operating history of the business, the more likely it will have sustainability during times of economic recession. The lower risk of acquiring company makes any entrepreneur much stronger candidate for either a business loan or a working capital one credit.