THE TEN COMMANDMENTS OF BUSINESS ACQUISITIONS

The acquisition of an operating business is a significant transaction involving many

complex legal, tax, accounting, and logistical issues. Like many other skills, expertise in business

acquisitions is typically obtained only through repetition and breadth and depth of experience.

During the past 25 years, the Ben Calkins Law Firm has been involved in the acquisition of dozens of businesses, large

and small, domestic and foreign, and engaged in industries ranging from product distribution to

service providers to heavy industry to agriculture. We do not claim to have seen everything, and

each transaction is different, but we see prospective buyers fall into the same traps with alarming

While there is no substitute for expenence, we have noticed some rules generally

applicable to acquisitions. Observations of the "Commandments" presented in this article will

often result in a successful acquisition that might have otherwise been unnecessarily aborted.

Perhaps just as important, adherence to these "Commandments" can help an acquiror avoid much

of the frustration and expense that is often involved in the process. If followed, these rules will

often help an acquiror prevent a good deal from going bad.

I. Know what you want; know what its worth to you.

Before proceeding with any acquisition, you need to understand your goals for the

transaction. This will help you understand if the transaction is a "good fit" for you or your

business, as well as help you evaluate the associated transaction costs. In addition to the purchase

price, there are going to be transaction costs and other expenditures of time and money

associated with any acquisition. In order to best rationalize and ensure that these costs are

justified, you should carefully analyze any potential acquisition opportunity with a focus on the

benefits of the acquisition.

What is the business worth to you? In acquiring a business, it is not productive to spend

time counting the money going into other peoples' pockets. Your focus should be on the business

opportunity that the acquisition represents going forward, and you should not be distracted by the

profits that the seller or others are going to derive from the transaction, which are often perceived

as an unconscionable windfall. If the seller was successfully able to build or grow a business for

sale at a premium, the seller should understandably be entitled to this profit. You should assess

the acquisition opportunity on its merits and realize that if the seller generated significant profits

from operating the target, then you should be able to do likewise.

Realize that legal or accounting transactional expenses are a one-time cost. If the

professionals are well chosen, these expenses will constitute money well spent to avoid any

headaches (or even litigation) going forward.

II. Play ball in your own league.

In evaluating acquisition opportunities, too many prospective buyers have an appetite that

exceeds their grasp by a substantial margin. Prospective buyers should be realistic and prepare

their acquisition criteria or profile taking into consideration their capital and experience. Since

many sellers are only interested in motivated and financially-capable buyers who will be able to

complete a transaction quickly, a prospective buyer should have the means to complete a

transaction before entering into the bidding process. If a prospective buyer's capital is limited,

the buyer should not assume that family and friends will come out of the woodwork with funds

on the eve of closing. Rather, you should consider opportunities that require less capital.

Additionally, you should generally have some background or experience in the type of

business being acquired, and there should typically be some synergy between the target company

and your existing business. In addition to the obvious business issues, if you are a "good fit" as

an acquisition partner, it will be easier to distinguish yourself from other suitors and present

yourself to the seller as a "serious" buyer. If your background, training, and experience pertains

to operating a foundry, acquiring a foundry or a related business, instead of a radio station, for

example, would be a more successful strategy to follow. Your chances of success will increase

significantly if you are candid and realistic in assessing your capabilities.

III. Obtain the exclusive right to negotiate.

Moving forward with an acquisition will invariably require significant investments of

time, money, and other resources. Because any business for sale will likely attract multiple

potential acquirers, these investments will be wasted if the seller ultimately decides to deal with

another suitor. Accordingly, you should protect your interests by obtaining the exclusive right to

negotiate with seller as early as possible during the process. Typically a seller will agree to

negotiate exclusively during a limited time period once the parties have reduced the material

terms of the transaction to a letter of intent, term sheet, or similar document. In obtaining

exclusivity, you should be certain that the business owner is prohibited not only from selling the

business during the period of exclusivity, but also from showing the business to other

prospective buyers or negotiating with them during that period.

IV. Use seasoned financial and legal advisors.

Early in the process, a prospective buyer should assemble a team of advisors, including

an attorney, an accountant, and possibly a business broker or investment banker. Buying a

business is a complex process, and each of these professionals should be selected based upon

their experience in representing clients in mergers and acquisitions. A buyer should no sooner

retain an attorney specializing in medical malpractice claims to handle an acquisition than hire a

pediatrician to perform open heart surgery. You and your professionals should work closely as a

team throughout the process.

V. Be proactive.

You should not wait for opportunity to knock, but should be proactive in identifying and

generating opportunities. Do not assume that, by merely networking with accountants, bankers,

brokers, ohio business lawyers, and other professionals, the ideal acquisition opportunity will surface. After

you have prepared acquisition criteria or a profile in consultation with your professional team,

you should search for suitable opportunities and approach business owners directly.

As part of this process, you should make sure to introduce yourself to several prospective

lenders. Lenders are often "tapped in" to the business community and may be in a position to

bring an opportunity to your attention that you might not otherwise see. More importantly, you

need to be able to access capital quickly when an opportunity arises. If you already have a

relationship with one or more lenders, it will be easier to secure the necessary capital than if you

are approaching lenders "cold."

VI. Don't openly criticize your target.

Many prospective buyers make the mistake of criticizing the business that they wish to

purchase, especially during preliminary discussions or the initial facility tour. Some prospective

buyers mistakenly believe that by "knocking" the business, they will convince the seller to

reduce his or her expectations and, ultimately, the purchase price. Unfortunately, the practical

effect of this approach is to slow momentum and potentially kill a deal.

For many business owners, particularly those who have "founded" the business, the

business and its management and employees are truly members of the family. The business

owner has built the business and is undoubtedly, and deservedly, proud of it. A business owner

wants to know that his or her business and employees will be in good hands following

acquisition. Keep in mind that you may also be working with the seller for some period

following the acquisition-{)ften the seller is engaged in a consulting or other capacity following

the closing in order to transition the business to new ownership.

As in most cases, you attract more flies with honey than with vinegar. Your likelihood of

successfully completing an acquisition will increase substantially if you develop a strong

relationship with the business owner and convince the owner that the business will be valued and

will be in good hands following the acquisition.

VII. Establish and maintain momentum to meet your timetable.

Attractive acquisition opportunities are difficult to find, and numerous buyers are out

there actively seeking and identifying opportunities. Potential sellers are often under a tight

timeframe, and are often evaluating purchase offers from multiple potential buyers. As noted

above, you will often only have a limited period of time to negotiate exclusively with the seller.

You are therefore well advised to proceed quickly to secure any suitable acquisition opportunity.

Momentum is a significant factor in mergers and acquisitions. You should certainly

undertake a due diligence review of the acquisition opportunity, and should always proceed

carefully. However, momentum needs to be built and sustained through the closing.

Too many prospective buyers wait too long to proceed with the contemplated acquisition,

and this often results in a loss of a deal. If you see an attractive acquisition opportunity, consider

making a written offer as early as possible in the process. The offer should of course be non-

binding and subject to various contingencies (including a due diligence review of the target). An

offer subject to further review is infinitely more credible than no offer at all, and allows the

buyer to determine whether you are "in the ballpark" before proceeding further. Further, you will

have gained the seller's attention as a credible buyer by making a serious offer.

Once an exclusive negotiating relationship is established, you should at the outset

establish realistic time frames for due diligence, negotiation, documentation, and closing. You

should, however, be prepared to meet your own timetable, however, because a failure to meet

deadlines will invariably result in unnecessary delay, expense, and frustration.

VIII. Offer a fair price.

Building on Commandment Number 7, you should try at the outset, even with limited

information, to offer and negotiate a fair price for the business. Don't insult the business owner

by making an offer that you know is unconscionably low. While it is always advisable to leave

"room to move" for negotiating, if you propose an unconscionably low price in the belief that

you will be able to compromise during later discussions, the seller may summarily reject you as a

non-serious buyer. Relatively few opportunities can be "stolen," and a deal is probably not worth

pursuing if you are not prepared to offer a purchase price that is within the range of

reasonableness.

Conversely, don't propose too high a price on the theory that you can whittle it away.

You may not get the price concessions you expected, and you may wind up over-paying for the

deal. At the very least, aggressively re-negotiating the price after a letter of intent is signed will

undoubtedly poison the atmosphere, and may kill the deal entirely.

You should strive to develop a relationship of trust with the business owner by, among

other things, making a legitimate offer in the first instance. There is no substitute for honesty and

integrity in any business negotiation.

IX. Engage yourself in the negotiations.

Once you have agreed on a price, you will not be able to just turn the transaction over to

attorneys to "structure and paper" the deal. Unfortunately, acquiring a business is a complicated

process, and each acquisition requires attention to numerous logistical steps and various

negotiation points that are often quite nuanced. As the operator of the business going forward,

you will have a "business" perspective that needs to be incorporated into the documents. You

should take time to read (and understand) all of the documents as they are prepared and

of course careful selection of counsel will make this process significantly easier.

Counsel, informed as to the terms of the transaction, will be able to document the transaction

expeditiously and professionally to clearly and concisely reflect the agreed-upon terms. Counsel

should understand that the task is to document the transaction in accordance with the agreed

upon terms, and not to improve upon those terms. Effective counsel will also understand the

difference between a significant negotiation point and mere minutiae.

A buyer should involve counsel at the outset and communicate with counsel continuously

throughout the process. Ideally, counsel should be integrally involved at the letter of intent

stage-this is when the transaction is generally structured, and seller will typically push to

negotiate most of the material terms at the letter of intent stage when it has the most leverage.

X. Be ready to adapt.

In business acquisition, as in other arenas, compromise (or the appearance of compromise) is an

essential skill, and you should avoid being in the position where you need to "set your feet in

concrete." When approaching an acquisition transaction, you should carefully avoid phrases like

"deal killer," "never," and "out of the question," all of which connote an unwillingness to

compromIse. A skilled negotiator will find areas for compromIse and will negotiate the

acquisition transaction in such a way as to produce a transaction which is a "win win" for both

parties. Inflexibility will quickly eliminate the momentum that is so important if a buyer is to

successfully consummate an acquisition. Keep in mind also that you may be working with the

seller post-closing during some sort of transition period. Accordingly, it is in everyone's best

interests to work in a collegial and cooperative manner towards closing.

Experience is the process of learning by doing, and much of what the most successful

deal makers know is the result of exactly such (often painful) experience. You can avoid

unnecessary pain and exponentially increase your changes of success by adhering to the rules

described above.

Visit us at Ben Calkins Law Firm for a free consultation!