Editor’s Note: This is part two of a two-part series taken from Live Oak Bank’s “Guide to Buying a Business.” The guide is a comprehensive overview for prospective buyers to help them prepare for an acquisition. Part one was featured in the January/February 2021 issue of Funeral Business Advisor Magazine and covered business trends and operations, market trends and how to prepare for ownership. To download the full guide, visit www.liveoakbank.com/fba-guide.
Are you considering purchasing an existing business? If so, this editorial will help guide you through the process. Note that acquisition is simply a more formal banking term that is used when talking about the purchase of a business. This editorial’s ultimate goal is to put you on the path to success.
THE ACQUISITION PROCESS
There are multiple steps involved in purchasing a business. First you should look for a partner who believes in your success and is willing to take the journey alongside you. Here is the process you should take together:
Gather Your Team
Before you embark on an acquisition, it is wise to have a team of trusted advisors, including a CPA and an attorney. It’s advisable that they have prior experience in acquisition financing.
Explore Financing Options
Lenders who understand the unique aspects of a business will be able to structure the loan to best benefit both the buyer and seller.
Determine the Purchase Price/Deal Structure
Agreeing on the purchase price is a fundamental step that should occur early in the process. The purchase price should be based on a combination of asset values, annual revenues, multiples of earnings and other intangible assets. The building, land, equipment, and furniture will constitute the tangible assets.
Sign a Letter of Intent
Sellers often require the buyer to sign a letter of intent, which is an agreement that prohibits the seller from negotiating with other potential buyers. It also prohibits the buyer from discussing any details of the business to outsiders.
A lender will look at the buyer’s personal credit in addition to the financials of the business. How someone manages his or her personal credit is typically a strong indicator of how he or she will manage them business’s credit. When preparing for financing, the buyer should take steps to protect personal credit and avoid making any purchases that will affect his or her credit score.
The lender will ask for the following requirements from the buyer:
1. Three years of business tax returns
2. Year-to-date (YTD) income statement and current balance sheet
3. Comparable income statement and balance sheet from previous year
4. Projections for at least the first three years under new ownership
As you navigate through the due diligence period, this is the time where the serious research and analysis is done. Make observations and inquiries related to:
1. Historical financial statements
2. Business tax returns
3. Customer/client lists and applicable contracts
4. Supplier/vendor list and applicable contracts
5. Monthly sales breakdown to determine seasonality
6. Current pipeline
7. Inventory list
8. Employee handbook, organization chart and any employee
9. Competition and market share
10. Current marketing strategies
Close the Deal
At this point, the deal is done and there is no room for further negotiations. There is a fairly robust closing checklist that the buyer will need to complete before closing the sale. Once closed, it is now time for the buyer to focus on their comprehensive post-acquisition plan.
WHAT LENDERS LIKE TO SEE
From the Business from the Business
The lender will consider the following criteria to ensure that it is a viable business for them to fund.
Lenders like to see positive trends when examining financials. A decrease in sales or revenues can be a red flag. If the business has negative trends, be sure you can identify the problems and include ways to increase business in your business plan.
When purchasing a business, the reputation of the business can be considered an intangible asset. The staff and community relationships play an important role in the success of the business. Lenders like to see key employees continue working with the new owner, as it diminishes risk.
Lenders want to see a well-thought-out transition plan. The transition and training period can range from one to 12 months, depending on circumstances. Work with the seller to negotiate the training and transition and clearly define them in the purchase agreement.
When a seller finances even a small portion of the deal, it shows the lender that the seller is confident in the new owner’s abilities and leadership. The terms of the seller carry note are negotiated between the buyer and seller.
Lenders may analyze the operational and transitional working capital needs of the company.
From the Buyer
The lender will need a clear picture of you to confirm that you are suitable to run a business set up for success.
Personal Credit History
Anyone who will own 20% or more of the business will need to have acceptable personal credit histories. If any of the guarantors have a history of delinquencies or bankruptcies, that could negatively impact the chance of obtaining financing.
Buyers have to provide the bank a business plan for the business they are acquiring. Lenders want to see that you have a clear understanding of the business you are buying. Include ways to improve the business where you see fit.
Equity Injection Funds
The buyer’s equity injection funds cannot be borrowed. It can come from the buyer’s savings, an equity investment from a third party or a gift from family or friends.
Transferable Management Experience
Lenders want to know that buyers have the necessary skill set to own and operate the business. Whether it’s previous small business ownership experience, sales and marketing, human resource management or financial understanding – this demonstrates that the buyer has what it takes to run a successful business.
During this process, you should look for a lender who are acquisition experts. Find a lending team that can accompany you on the journey to buying a business. FBA
Live Oak Bank’s team of funeral home and cemetery loan experts offer a variety of loan products to meet the diverse needs of the funeral profession and can offer small business funding of over $10 million. Their non-commission sales team will work with you to determine which product best fits the unique needs of your funeral home or cemetery. Whether you’re seeking to buy, build or improve a funeral home, their financing expertise and knowledge of the funeral home profession will help you reach your goals and avoid costly mistakes. Visit their website at www.liveoakbank.com/funeral to learn more.