This is part-three of my FIVE-part process for generating a significant amount of wealth via acquiring a business without spending any of your own money, growing and improving it quickly before selling it on and generating a big profit. In part-one, I introduced you to the concept of this five-part process and in part-two, I listed the 10 items you need to look for in identifying the perfect business to acquire. If you missed part-two, read it here before continuing with part-three.
In 2008, I left the comfort of large corporates and became a deal maker for myself. I have used my acquisition experiences since 1992 to develop a simple, yet effective 10-step process for finding quality, established business and acquiring them for no personal cash, even completely free in some cases. This is my 10-step process checklist.
1) Creating a dream deal specification
A dream deal specification is essentially a statement of what your ideal business will look like, and what it will not look like. It covers your skills, experience, the work-life balance you want and what sectors niches, products, customers, and locations are of interest to you. You also design a wealth creation plan and this helps you focus in on the size of business you need: For cash at closing, monthly or annual payments and finally the exit payment when you decide to sell your business.
2) Origination of opportunities
Origination is a fun part of the process. I use at least five approaches on a daily basis. These are social media, networking events, direct approaches, leveraging mine and others’ professional networks and finally business brokers, who have many good, unsold businesses on their books.
3) Research and analysis of targets
Once you have originated multiple opportunities, you now need to filter and compare them, so you get to work on the best opportunities mapped to your dream deal specification. You need to set up a basic list of criteria to judge each opportunity, leveraging the 10-point checklist for acquiring a cash free business, which we discussed in part-two of this series.
4) Valuation and deal structure to create a cash free deal
The structure is all about looking at the basic sales and profit numbers to determine the annual free cash flow. This cash will determine what cash can be paid to the seller over a three to five-year period. The future cash is called deferred consideration, vendor finance or loan notes. The payments can even be contingent on financial performance so if the business doesn’t perform, you pay less money, or nothing at all.
5) Raising finance to get paid at closing
Remember, YOU are not borrowing the money, the business is and it’s a totally separate legal entity. You need to assess the fundability of the balance sheet to raise finance against the business assets. The cash raised is to pay the seller some cash at completion if he or she needs any. And, to provide capital for you to grow the business and finally to provide you some cash personally at completion.
6) Making offers and negotiations
No matter how good the business is, I always offer first only to take over the liabilities of the business (leases, contracts, etc.) so all the money raised is mine. From experience, 10% of business owners will accept this. I then have three additional steps depending on how badly I want the business however I never provide any personal capital. These four steps in total get me a deal 50% of the time. The key is to originate multiple opportunities and play them off against each other to see who cracks first.
7) Deal exclusivity and completion planning
Once you verbally agree a deal, you need to create a one-page letter of intent to acquire (LOI). The LOI is effectively an option for you to complete the deal within a specific period and subject to the high-level terms agreed. The LOI also gives you exclusivity, free of competition, to complete the deal.
8) Due diligence (done by 3rd parties on a contingent basis)
During exclusivity, it’s important to do three types of due diligence (1) financial due diligence, (2) commercial due diligence and (3) legal due diligence. There is no requirement for you to do this yourself, except some of the work contacting customers, etc. in (2) so you can introduce yourself. It’s best to leave the majority of due diligence to lawyers and accountants. This work is typically performed on a contingent basis, and this is very commonplace. You typically have to pay a higher fee, but the business pays the fees, not you, only if and when the deal closes.
9) Legal contract (done by 3rd parties on a contingent basis)
Similar to due diligence, the lawyer will negotiate the purchase agreement for you (and any finance contracts) on a contingent basis. This work will also include negotiating warranties and guarantees from the seller. These are essential to provide you an adequate safety net, should anything materialize during your ownership, that happened in the past, that the seller didn’t disclose. However, most items are picked up in due diligence.
The day has arrived. You sign the legal paperwork, the funds transfer (including to you) and you go start work in your new business, meet your employees (if you haven’t done so already) and potentially start your next acquisition, which can be a bolt-on into the business you have just acquired. This can turbo-charge your growth since acquiring bolt-on acquisitions will give you complimentary customers, employees, assets, products and services. You can also eliminate significant overall costs from a combined operation to rapidly increase profit, the value of the business and your own personal wealth. I have personally seen businesses increase in value by up to 10x by making just one acquisition.
That’s it for part-three. In part-four, I will walk you through what you need to do as a new business owner, by creating an automated, killer business. I will share my 7P business success framework with you. You can access part-four here.