How do you build an acquisition-ready business?
Building a business that other companies may want to acquire requires research, strategic planning, and hitting the market with a good idea that is generating demand and revenue. Setting up legal protections for the business is an integral part of making sure that your business idea cannot just be copied by another. These may include some or all of the following and more:
- Trade secrets.
- Confidential client lists.
- Exclusive rights.
Prior to an acquisition, a business owner can take important legal and financial steps to get prepared, such as:
- Forming an LLC or corporation.
- Reviewing contracts for renewal and assignment.
- Review their Intellectual Property portfolio.
- Conducting a business appraisal.
A business appraisal can help you determine a valuation. A professional, like a CPA, can calculate how much your business is worth to inform negotiations. A transition team can ensure a smooth transition to protect your interests. An attorney, a CPA, and a financial advisor can form a team to perform due diligence and avoid tax or legal penalties.
To be acquisition-ready, an owner needs to know their business inside and out. A Business Fact Sheet can help organize information and provide a reference for other legal documents or letters. Even before a buyer approaches, it is good practice to be ready ahead of time to sell your business. Taking stock of the business can lead to improvements that may provide more value to a prospective buyer.
When is the right time to get acquired?
It depends. If your investors are pushing to exit, an acquisition could ease that process and please your investors. A few common situations that may signal a business owner to seriously consider an acquisition offer include:
- If your company is maturing quickly, you may not have the capital to keep pace and expand into new markets or meet demand. Getting acquired may allow the business to grow to meet that demand.
- When there is more competition in your area for your business than you realize, or from when you first started, the market may be oversaturated. An acquisition by a rival company may benefit both businesses, by bringing together resources and more.
There are also less formal factors that can play a role. Often, business owners may tire of running the business or want new challenges. A full or partial exit through liquidation or recapitalization of the business are two options for those business owners. While the latter enables a full exit from the business, it may not net as large of a return as one might expect. On the other hand, recapitalization is a common structure for acquisitions and enables the business owner to remain partly involved or on the periphery.
There are three structures that can set your role post-acquisition: Limited Partnership Agreement, a Partnership Agreement, or a Joint Venture Agreement. Also, you may convert your equity ownership into cash, so selling your business could free up liquidity.
Alternatively, there are many reasons to consider not selling your business. For instance:
- Owners might be essential to managing key client relationships, or performing the work.
- The business may not survive a separation.
- A business may not have steady revenue.
You want an acquisition of your business to be as successful as possible, so recognizing these traits in your situation is critical.
How do I market my business for acquisition?
A public relations campaign can promote your story, your product or service, and help position your business to generate demand. Often, a company's board of directors can help assist with the campaign.
Like with any sale, your target audience dictates your marketing efforts to reach prospective buyers. Selling a business may require industry networking, or establishing a team to help. A broker or team of customer acquisition specialists can attract potential buyers with a targeted marketing approach.
What can business owners do to prepare for an acquisition?
Once the preliminary framework is agreed on, a Merger Agreement, a Business Sale Agreement, and a Deal Letter can detail the sale's terms. Shareholders, stakeholders, employees, contractors, and vendors may need to receive updates during and after acquisition depending on the terms.
Typically, business owners make a transition plan based on the timelines and framework of the agreement. A transition plan may aid stakeholders on both sides prepare for integration. It may also help line up and solidify important business partnerships so clients don't jump ship.
In addition to preparing people for the transition, a company's physical and non-physical assets need to be prepared as well. This includes things like machinery, computers, furniture, intellectual property and more. When it comes to intellectual property, the acquiring business may need to have trademarks, copyrights, and patents assigned to it through various agreements.
What happens if an acquisition fails?
Acquisitions fail frequently. Between 70% and 90% of mergers and acquisitions fail. This may be due to some of the following reasons:
- Inaccurate valuations.
- Lack of due diligence.
- Overpayment by the buyer.
- Overestimating synergies.
- Failures in operational and cultural integrations.
- Key people leaving or being made redundant.
- Lack of understanding on how the company is successful.
If an acquisition falls through, it is not all doom and gloom. If the issue cannot be corrected, there may still be other options to explore. During preliminary due diligence, your team may prepare a back-up plan so if the acquisition does fall through, your business is prepared to stand on its own.
Thinking about getting your business ready for acquisition or merger with another company? Reach out to a Rocket Lawyer On Call® attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.