Your Acquisition Strategy Essential Basics You Need to Know

Before you get into the practicalities of buying a business, there are some basics you really need to know. These are important principles and habits; without them, you start the entire process at a disadvantage, and yet they are really simple to learn and to use.

Before you get into the practicalities of buying a business, there are some basics you really need to know. These are important principles and habits; without them, you start the entire process at a disadvantage, and yet they are really simple to learn and to use.

Four things to remember

1. Your personal finances do not prevent you from buying a business

If you believe the amount of money you have in the bank will stop you from buying a business you’ve put a block in your way from day one. We have to unblock that false belief or you’ll never buy a business because you’ll never believe you can buy a business – you’ll block your own progress and success. The important things are mindset, confidence and knowledge.

2. You do not run the business itself

I own a number of big nurseries with currently around three hundred staff. On any given day you can be sure there’s an issue somewhere – someone has called in sick or put their notice in, or one person has upset another and there’s drama, or someone isn’t pulling their weight and so they need to be spoken to, and that’s fine. These things happen in all businesses. Do any of these things cause problems for me? No. Because I have people to deal with all of that for me. With the model I teach, you don’t get involved with the day-to-day management of the business. You can build an empire of businesses without getting stressed about any of this stuff.

3. All the profit the business makes is yours

If you’ve only ever been an employee it might take you a little while to get your head around the fact that all the profit is yours. You’re no longer restricted to earning what someone feels like paying you – if the business makes more, you can take more.

4. There need not be any personal risk

This is huge. Read it again. Because if you set the acquisition up the way I teach, there need not be any personal financial risk whatsoever.

Language is important

The way you come across matters. While you don’t need to be an expert in specialist areas, you do need to start speaking like a professional business buyer, not least because that’s what you should be aiming to become.

You need to professionalise your language as this will give you confidence when speaking with other professionals, such as solicitors.

Here are ten words and phrases you need to know:

  1. Consideration – that’s the payment you agree to make to buy the business.
  2. Initial consideration – that’s the amount paid on completion of the deal that makes the business legally yours. It’s not the full consideration, just a part of it.
  3. Deferred consideration – that’s the part of the payment you hand over later. You agree the consideration, pay the initial consideration to make the business yours, and then defer the balance over a period of time.
  4. Share purchase – you buy the shares so you get the whole business, everything it owns (its assets) and everything it owes (its liabilities).
  5. Asset purchase – rather than buying the shares and taking both assets and liabilities, you buy only the assets. I used to do mainly share purchases but because things changed due to the Coronavirus pandemic I now do mainly asset purchases. Because things move so fast now, we don’t always have the time to do sufficient due diligence (number 10 on this list) to identify all the liabilities, so we buy the assets and leave the liabilities behind.
  6. Special purpose vehicle (SPV) – that’s the company we set up to buy the shares or assets in the business we are buying. The ‘special purpose’ of this company is to buy the business we want to own. You will set up an SPV for each business you buy.
  7. Holding company – this is an entity that doesn’t trade; instead, it holds ownership of your SPVs.
  8. Heads of terms (HOTS) – this sets out the terms of the purchase agreed in principle during the deal negotiation. It can be a simple document which says, this is the company we’re buying, this is what we’re paying, and this is the deal structure. The deal structure is how we’re structuring the payment – for example, initial and deferred consideration.
  9. Pre-pack administration – the terms of a purchase deal for an insolvent company agreed in advance with the seller and the administrator. With an insolvent business the liabilities will outweigh the assets, so you need to put it into administration and buy just the assets, leaving the liabilities behind. ‘Pre-pack’ means you’ve agreed everything in advance with the seller and the administrator.
  10. Due diligence – the checking done by you and your deal team to make sure the business is what the seller says it is. You can tweak the deal depending on what you find during the due diligence process.

Clarify your dealmaking strategy

You will have skills that you can use to raise the value of any business you buy.

They might be hard skills such as:

  • Sales (you know how to attract and retain customers);
  • Marketing (you understand how to create marketing systems, unearth hidden profits, and increase the lifetime value of clients);
  • Finance (you understand how to make a business perform, financially);
  • Operations and logistics (you can streamline processes);
  • IT (you can systematise operations, automate processes, and introduce reporting); and
  • HR (you can manage redundancies, and attract and retain top performers).

Or they might be soft skills such as:

  • People management;
  • Motivating staff;
  • Building rapport with staff, customers and suppliers;
  • Team building; and
  • Effecting cultural change, communicating your vision for the business and winning hearts and minds.

Which hard or soft skills do you have that you can use to boost the value of any business you buy? You might look at a business and say, ‘You know what? They’ve got the wrong people in the wrong jobs. Half these people are not right for this company and really shouldn’t be here. Let’s find the right people.’ Then you hire the right people and put them in the right jobs and the business takes off as a result.

Maybe you’re brilliant at inspiring employees to unite for a common goal. Perhaps you’re fantastic at accountancy, or you’re brilliant at marketing.

If you have great rapport-building skills, you could visit some of the company’s former clients. You could say, ‘I’m the new owner. Maybe if you give us a second chance, we can prove to you that we’re the right company to help you solve your biggest problem.’

The thing is, with some businesses, a single customer might be worth hundreds of thousands of pounds, so if you win just one back, it might be enough to turn the business round.

If you’re great at effecting cultural change, you could lift employee morale. It could be at rock bottom because employees will have picked up on the fact that the business is not performing like it used to. When you take over the business, you could say, ‘We know we’ve got lots of competitors out there. We know that we used to be right there at the top, and that we’ve slipped down the ladder. Our goal in the next twelve months is to take us back to the number one position, but we can’t do it without your help.’

Obviously, it takes more than a speech to lift employee morale, but you want to show from the outset that you have a vision for the business and they are part of that. It’s about winning hearts and minds.

There will be aspects of being a dealmaker that you hate or in which you don’t have any expertise, but the good news is that doesn’t matter.

You don’t need to be an expert in everything!

Remember, you don’t need to become an accountancy or legal expert – 80% of the ‘hard’ work is done by others. Your focus is on finding a business to buy then closing the deal.

You should avoid getting caught up in accountancy or legal issues. If you start getting overwhelmed by accountancy or legal details, you’re not delegating correctly to your deal team. Your focus must be on finding a business to buy then closing the deal – that’s the fastest way to get success in acquisitions. If you get caught up in things other people are experts in, you potentially lose money twice over; first, because you aren’t doing what you should be doing and second, because they aren’t doing what you’re paying them to do.

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