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Business Acquisition Due Diligence – Accounting

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The Point: The world of mergers and acquisitions is fantastic, especially once you have an prospective organization under Letter of Intent (LOI). This time period is one where due diligence is conducted to confirm whether the organization is what it says it is. Especially important during this due diligence time period is the analysis conducted by an Accountant. So in this post, we’ll explore business acquisition due diligence from an accounting perspective… Enjoy!

For many accountants, business acquisition is an onerous and time-consuming process. It is not just the cost of purchasing additional capital or paying for legal assistance, that can be a drain on funds. The sheer complexity of mergers and acquisitions often requires a large investment in professional services in addition to time, dedication, and effort. However, many accountants fail to realize that the vast majority of mergers and acquisitions are performed by lawyers and accountants. This post will highlight some of the challenges accountants face in the process of business acquisition due diligence.

Due Diligence – 2 Primary Challenges

There are two primary reasons why accountants are the primary force behind acquisition activities. First, they have access to the appropriate legal information and personnel to make a knowledgeable purchase of a business. Second, they are well-versed in the financial statements and the business plans of both companies. In short, they understand the products and services that each company offers and the expectations from the purchase. Although these key assets are important, it is sometimes unrealistic to put such great faith in them when it comes to the complex negotiations that must precede a transaction. For this reason, it is vital that accountants remain neutral in their recommendations to the management regarding the proposed merger or acquisition.

In reality, most business transactions occur at a slow pace, with little or no external input. Therefore, accountants become involved only after significant due diligence has been conducted. The process may begin with a simple review of financial statements and company records to determine if the prospective acquirer is making a sound purchase or is entering into a deal with unrealistic expectations. This preliminary examination of the business’s records should not take more than a few hours, and is time consuming, but it is time well spent.

Accountants and Lenders in Due Diligence

When a company is in the process of obtaining financing, there may also be instances where the lender requires diligence in connection with the loan. Lenders are becoming increasingly educated about the benefits associated with acquiring an existing business rather than an entirely new one. As a result, the process may include requesting business information from accountants as a part of the due diligence process. Accountants may provide information concerning the companies’ credit ratings, operational revenue, and cash flow, as well as any positive or negative indicators that reflect on the business’s financial health.

Accuracy Counts in Due Diligence

For the individual who has entered into a business acquisition transaction, it is imperative to maintain accurate accounts in order to ensure that the transaction goes as smoothly as possible. Good accountants will have access to information that is rarely shared within a business acquisition firm. This type of specialized information allows individuals to make intelligent decisions regarding the purchase of a business. It will provide the acquirer with accurate information that can be used to determine the amount of funds needed for the acquisition and to determine if the business has the potential to increase profit and revenue. In fact, business acquisition due diligence is so important that businesses have their own internal accountants as well as outside accountants who are responsible for performing these tasks.

SUMMARY

Most business acquisition firms prefer to hire accountants who have previous experience in acquisitions as they know how to manage the due diligence process. Additionally, a business acquisition consultant should focus on developing relationships with other business acquirers to ensure that the due diligence process goes as smoothly as possible. Most consultants will perform all of these tasks on behalf of the acquirer. In fact, most will dedicate several of their business acquisition specialists to working exclusively with the acquirer.

Startup vs Acquisition – A Comparison of Two Entrepreneurship Models

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Often, when entrepreneurs ask the difference between startup vs acquisition, they are confounded by the differences and can’t make up their minds about which choice is right. They often think that there are clear winners and losers in terms of an entrepreneur’s success or failure. The truth is that there are subtle differences between startups and acquisitions. For starters, it’s not the size of the company that makes the difference between a startup and acquisition; in many cases, it’s the lack of a market or the size of the market that makes the difference.

Startup vs Acquisition

The differences between a startup and an acquisition vary primarily based on the size of the target market. A startup may be started to fill a need in the marketplace; that is, it was created to address a problem that existed in a segment of the population that had not been well served by established companies before. For instance, many new food stores started as franchises that expanded to meet the needs of a local market. In such cases, the company’s success came from its ability to serve a specific segment of the population.

The Acquisition

With acquisitions, on the other hand, the objective is much different. Buyouts are done primarily to acquire control of already mature companies with long-standing operating systems, market shares, and patents. While these companies may have the necessary attributes to be attractive targets for a startup, they are unlikely to have strong market shares or a profitable business model.

Sustained Growth & Profitability

An acquisition occurs when a business owner takes control of a company that is doing well in the market but lacks the ability to sustain growth and profitability. As the buyer, you typically don’t acquire a startup with the intention of developing it into a successful business yourself. Instead, you look for a business that can help you realize your financial goals. This can mean developing the company further to bring it closer to the goal you’ve set, or it could mean acquiring a company with complementary assets.

Startup vs Acquisition: The Key

The key to both startup and acquisition is finding the right partners. Acquiring a startup is easier when you purchase a successful company because you already know what it’s capable of. On the other hand, you’ll have a lot of work to do when buying an established business. Take for example the purchase of an organization (and we see this all the time at Tip of the Spear). At the time when the purchase was made, Company #1 was the largest company in their sector and had already demonstrated its ability to grow and profit. Therefore, making Company #2 in a desirable position to purchase/acquire Company #1.

SUMMARY

Because of the Startup vs Acquisition — A Comparison of Two Entrepreneurship Models, it’s easier for one company to acquire another company. By using a strategy for its acquisition, an organization can quickly became a dominant player in the industry. This type of acquisition will work best for entrepreneurs and venture capitalists with a proven track record in developing successful businesses. However, if you’re starting from scratch, it’s probably a better option to go for a startup rather than an acquisition (Don’t get me started on how hard it is though!)

Sam Palazzolo

Acquiring a Business – The Process

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The Point: You’ve made the decision that now is the time for you to explore buying a business. But how will you actually go out and acquire a business? In this post, we explore the process involved at a 30,000 foot elevation in acquiring a business and the process… Enjoy!

Acquiring a Business The Process

The acquisition of a small business is not easy, but it can be done. There are many factors to consider such as financing, location, resources, and entrepreneurs who are willing to invest time and resources. Many businesses fail in the first few years and often several factors are involved including management and the way the entrepreneur does business. While many new businesses fail within the first year, more than 25% of all businesses make it through the five-year period with excellent results.

Acquiring a small business requires some patience, education, and hard work to make it successful. Small business acquisition experts must be able to evaluate an acquisition case-by-case basis to make sure that the best opportunities for expansion are available. They must also be prepared to do extensive research and look at different companies in order to find the best ones to partner with. For most entrepreneurs, it takes at least a few years to successfully acquire a small business. Some of the best opportunities come quickly, while others take longer.

When there is an acquisition case to be made, it is important to first determine what kind of business model will work best. There are many options for small businesses, and the best way to determine which business models to consider is to look at the business models of competitors who are successful. This will give an entrepreneur ideas on what features to look for, as well as what to avoid. Successful acquisitions will allow an entrepreneur to realize their full potential and to reach their goals. These are some of the reasons why it can be so difficult to purchase a small business.

Acquisition Entrepreneur – Art or Science?

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The Point: We’re often asked about our Mergers & Acquisitions business specifically, “How can I be an Acquisition Entrepreneur?” The reality is that most entrepreneurs that take on an acquisition are not born that way, they are trained to do so. If learning is at the forefront, what else is involved in the background? So, in this post we’ll explore the Acquisition Entrepreneur – Art or Science… Enjoy!

Things to Consider As an Acquisition Entrepreneur

The acquisition of a business is often thought of as the same thing as buying an existing enterprise, however, there are several key differences. An acquisition can be more difficult for some entrepreneurs because of their inexperience and limited financial resources. Acquiring businesses involves a series of steps.

No Cowardly Lions!

The first step to successful acquisition is having the courage to buy a business. There is often fear among investors that if they invest in a startup it will fail. This is not true. The reason for this is that successful entrepreneurship is built on sound principles, strong leadership, and an excellent business plan.

You are an Investor

To buy a business, investors require information about the owner. They want to know the entrepreneur’s personal and professional background. This includes information on the founders, the current business model, and the products or services offered. Having this information allows investors to evaluate the potential acquisition more objectively.

What Does the Business Do Well?

Investors also look for the strength of a business. In addition to a strong business plan, an entrepreneur should have experience in his field. Additionally, he should show that he has the ability to manage and grow a business. In addition, it is important for a start-up to demonstrate how the business will survive during tough times. These can be difficult to assess when a company is still in the development stages.

What is the Legacy of the Business — and You?

When buying a company, investors look for companies that are well-established and that have a solid financial footing. It is also important for the entrepreneur to convince potential investors that he is capable of managing the business. By conducting a survey of the company and its current location, he can show investors that he knows where he is going. He can also convince potential funding sources that he has a great idea for making the company successful. If he is able to generate interest from interested funding sources, he may find himself able to buy the company more easily than he had originally expected.

Time is the Great Equalizer

Another important thing to consider when it comes to being an acquisition entrepreneur is the time line for making a successful acquisition. Most companies that are interested in buying a business develop interest over time. However, it is not always easy to close a deal at the right price and time. As a result, some companies prefer to wait to make an acquisition until they have more negotiating power. This gives them a better chance to get a good deal on the business. On the other hand, a strong acquisition entrepreneur knows that he needs to quickly close a deal so he needs to be ready to negotiate with all of his potential funding sources.

SUMMARY

In this post, we’ve explored the topic of Acquisition Entrepreneur – Art or Science. We know that there are a lot of ways in which you can explore your entrepreneurial spirit. Becoming an acquisition entrepreneur is a smart way of doing so.

Sam Palazzolo

Five Tips For Becoming an Entrepreneurship Through Acquisition

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The Point: Being an entrepreneur is great! However, the saying, “Work smart!” should be a tactical advantage with a strategy of buying a business being front/center! I see time and again entrepreneurs that start a business from scratch — and that’s just plain hard work! In this post we’ll explore Five Tips For Becoming an Entrepreneur Through Acquisition (ETA)… Enjoy!

You do not need to begin a new business from scratch in order to become an entrepreneur. In fact, purchasing a company with which you are familiar could be a wiser choice. Creating, marketing, and then selling companies are all a part of your entrepreneur s journey. There are certain things you will want to keep in mind when looking into purchasing a company, though. Below are four tips for becoming an entrepreneur through acquisition.

Tip #1 | Entrepreneurship Through Acquisition

The first and most important step to becoming an entrepreneur is being able to finance your business. Financing is crucial to making any business work, but it is even more critical when you are just starting out. If you are working with a limited budget, your options may be limited. In order to get everything lined up, you will want to begin working with a lender as soon as possible, particularly if you intend to use credit cards or other forms of capital. When you are seeking seller financing for your business, you will have to provide substantiation of your income, a solid plan for increasing your sales, and a clear plan for paying back the loan.

Tip #2 | Entrepreneurship Through Acquisition

The second step in becoming an entrepreneur through acquisition is finding a seller financing program. Most traditional banks do not look favorably on businesses that have never made a profit or do not have a history of revenue. In order to get everything lined up for your business, you will have to secure funding from either a bank or a private investor. A good real estate investor will be especially helpful because he or she can get you loans with a lower interest rate than what you can get from a bank.

Tip #3 | Entrepreneurship Through Acquisition

The third tip to becoming an entrepreneur through acquisition is to make sure you can make a profit on your investment after your first acquisition. The ideal scenario would be to purchase a business with low start up costs and high revenue potential. Most businesses fail shortly after they are launched. If you cannot turn a profit on the first sale, you may have to take a loss on every sale thereafter until you break even.

Tip #4 | Entrepreneurship Through Acquisition

The fourth tip to becoming an entrepreneur through acquisition is to consider a gradual increase in profits over time. An entrepreneur does not simply buy a business with the best potential for revenue and expect a huge windfall from it the next day. Business development takes time and effort. Your job during the early stages of your business venture is to generate customers and build a strong relationship with your suppliers.

Tip #5 | Entrepreneurship Through Acquisition

The fifth and final tip to becoming an entrepreneur through acquisition is to consider starting your own company as a small business. When you start your own business, your goal is to have low start up costs, high annual revenue, and a strong customer base. This means you will have a limited amount of resources to work with in terms of finances. Starting your own business can be extremely difficult if you do not have a comprehensive business plan in place. You must set a budget and identify your target market to determine how much money you can invest in your new business venture.

SUMMARY

In this post we’ve explore Five Tips For Becoming an Entrepreneur Through Acquisition (ETA). If you’re ready to put the strategic advantage of acquisition — buying a business — to work for you instead of starting one from scratch, success is still going to be hard work. However, the outcome can be much more advantageous.

Sam Palazzolo