How do I buy an established business?

Buying an established business is a sequence, and each step is meant to inform the next. BDC, the Business Development Bank of Canada, sets out the steps from preparation to integration in four phases. This guide follows that order and adds the points where the choice you make early, such as buying shares or assets, changes what you have to do later. Nothing here is a view on whether a particular business is worth buying; it explains how the process is laid out.

Prepare before you approach anyone

BDC says anyone buying a business needs trusted legal and financial advisors to call on, and that answering questions honestly about what you want will help you define an acquisition plan and narrow the types of company you consider. It also suggests tapping your network, industry contacts and advisors to identify candidates, and researching a company as much as possible before entering negotiations. You may also want to involve experts in business valuation, information technology, human resources and marketing, depending on the business.

Know your money before you negotiate

As you start negotiations, BDC says you will want to be clear about how much capital you can put toward the purchase, how much equity other investing partners can contribute and what terms your bank can offer. It also advises meeting potential lenders and investors before approaching a business, which it says will help you avoid negotiating a deal you cannot finance. For the range of funding options, see what financing options exist to buy a business.

Meet the owner and draft a letter of intent

The goal of the early meetings, according to BDC, is to collect the information you need to draft a letter of intent. BDC describes the letter of intent as a negotiation framework and lists items it should include, among them a purchase price range, noting the final amount depends on due diligence, and the duration of negotiation exclusivity, the period in which the seller agrees not to solicit or consider other offers without first speaking with the buyer. Its list also includes a commitment from the seller to provide all necessary records, and terms for confidentiality and communication. BDC says to involve your advisors at this stage, including your lawyer, accountant, transaction advisor and lender, and notes that the letter of intent is not a binding offer but anchors the transaction terms to some degree.

Complete due diligence before the purchase agreement

BDC describes due diligence as the last of a business acquisition’s three key steps before you negotiate a purchase agreement, and says it gives crucial information on a target’s finances, prospects and legal issues. It names three types to perform on the target company, commercial, financial and legal, and says commercial due diligence involves understanding how the target makes money, its competitive environment, and its future goals and strategy. Its list includes accountant-prepared year-end financial statements, tax returns and any tax liabilities, along with leases, licences and permits. BDC also asks whether the figures match what the owner has said, whether tax returns match the financial statements, and whether key contracts such as leases, regulatory agreements and customer contracts can be assigned to you.

Decide between shares and assets, then negotiate the agreement

BDC states that purchasing shares comes with a very different set of responsibilities compared to purchasing assets. It suggests searching the Personal Property Security Registry (the Register of Personal and Movable Real Rights in Quebec) for liens on assets you are about to buy, and getting an indemnity agreement from the seller for unforeseen liability that arises for a period after the sale. BDC calls negotiating the purchase agreement one of the last steps of the acquisition, and lists what the final agreement will include: the scope of the transaction, payment terms, any indemnifications and warranties, and an employment agreement if the seller will remain for a transition period. For tax consequences that follow the choice, see why there is no tax basis step-up in a share purchase.

• Assemble your advisers before you approach an owner, including a lawyer and an accountant
• Write down your capital, partners’ equity and what your bank has said it can offer
• Treat the letter of intent as a framework, and check what it says about price range and exclusivity
• Ask for the due diligence documents in all three areas: commercial, financial and legal
• Decide with advisers whether you are buying shares or assets before the purchase agreement is drafted

Plan the integration

The last phase in BDC’s sequence is post-merger integration. BDC says you will need an integration plan to avoid missing essential steps, and that how you go about the integration can make or break your company. Consider drafting it while due diligence is still running, so that what you learn about key employees and customers can inform it. A related guide covers taking over a business after closing.