Articles
Establish Your Business Purchase Criteria
If you are considering purchasing a business you should take the time to define your “must have” and, to a lesser extent, “ideal” business purchase criteria before you take your first step to find a company to buy.
It is important to define what your absolute business purchase criteria are and what attributes of a company are just “nice to have”. Having these clearly defined and written will add a significant amount of efficiency to the entire business sourcing, definition, qualification and eventual purchase process. If you choose to utilize a business acquisition intermediary to assist you in finding your ideal acquisition candidate, having this fundamental information clearly defined will help them best serve your business purchase needs.
Business purchase criteria can be divided into two fundamental categories, “practical” and “subjective”. Practical business purchase criteria is best defined as purchase benchmarks that make sense to use no matter what business purchase transaction is made, these terms simply make practical sense. Subjective purchase criteria, like the term suggests, are business attribute measures and conditions that correlate with your own personal purchase criteria or preferences, business experiences, knowledge and risk/ reward tolerance levels.
Practical Business Purchase Criteria:
The potential list of business purchase criteria, terms and conditions can be long. The best way to start the process of defining your specific practical purchase criteria is to first list the general practical criteria categories when seeking a business to buy. These are categorically listed below, you may want to consider customizing them for your own use:
Business type: Service provider, manufacturer, distributor, wholesaler, retailer, software or E commerce based, or any combination thereof
Type of products or Services: Proprietary or generic, industrial or consumer, technical or non-technical, patent protected or not, software based or not, regional or international demand
Business Existence Phase: Start-up, early stage, emerging growth, established or turnaround
Primary Market Focus: Refer to the established Standard Industrial Classification (S.I.C.) code list: Construction, Mining, Transportation, communications, to name a few
Sales revenue and associated profit levels: Common criteria to define company “size” thresholds, minimum levels mostly, results defined for stipulated time frames, audited or not
Business headquarter location: Domestic only or international, regional or local
Type of business purchase transaction sought: Complete buyout, recapitalization, bankruptcy revival, investment only
Subjective Business Purchase Criteria
Defining subjective business purchase criteria, terms and conditions is often an ongoing process, difficult to do in one sitting because it truly is a “learn and accumulate as you go” process. Listed below is a good start to define some of the most significant subjective criteria categories you might also want to consider and edit for your own requirements:
| Voting control buyers | Availability of future business |
| Owner reasons for sale | Seller willingness to stay post sale |
| 5 year growth potential | Quality of existing management |
| Brand names | % of total sales from international |
| Customer purchase loyalty | Industry leadership position |
| Real Estate issues | Customer revenue concentration/mix |
| Pending litigation | Existing binding contracts |
| Company affiliations | Level of technology protection |
| Internet presence | Image of the industry |
| Cleanliness issues | Success dependency on # of employees |
| Industry macro trends | Labor force organization |
| Non-compete terms | Quality of board of directors |
| $ level of assets | Level of owner financing |
| Earn out financing terms | New products in the pipeline |
| Seller integrity | Seller personality |
| Relocation requirements | Level and terms of debt |
| Purchase price calculation | Ease of due diligence required |
| Financials audited or not | Location(s) of satellite operations |
| Status of computer systems | Condition of manufacturing equipment |
| Level of competition | Personal interest in their markets |
| “Fit” with existing business | Liability of the products/services |
| Length Product life cycles | Breadth and depth of offerings |
| Hazardous waste issues | Pending legislation |
| Corporate culture issues | Level of government intervention |
| Seasonality of revenues | Availability of critical raw materials |
| Representation/ Distribution | Acquisition candidates in the space |
| Cash flow | Capital required to grow the business |
| Customer support required | Financial status of key customers |
| Current level of market share | Customer churn rates |
When you think about it and actually get involved in pursuing a company purchase, you quickly realize that your success rate of finding your “ideal” company to purchase is a direct result of your ability to effectively locate viable potential acquisition candidates and cost effectively DIS-qualify them via your own, “well honed” business purchase criteria checklist.
Take the time and put in the effort required to finalize your business purchase criteria early on in your business purchase methodology. The old adage, “If you don’t know where you are going, you are certain not to get there” applies in this process. Finding a company to purchase that meets your EXACT purchase criteria rarely happens, but as you learned here, it all depends on the depth and breadth of your practical and subjective business purchase criteria.