The Deal Flow Funnel
Know what you're next steps are and the commitment to each one
“What if I’m not ready to engage the Broker? When should I submit an LOI? What are the steps to getting a company under LOI?”
I’ve talked to people that have been “searching” for a business to buy for 18 months.
Guess how many initial calls they’ve had with brokers/sellers?
Zero.
It’s intimidating to be going through the start of the acquisition process at times, but the worst thing you can do is nothing at all.
One benefit of opening up my calendar to people looking to acquire their next, or first, business is that I get insight to where people are getting stuck.
Then I get to help more people by writing about it in the newsletter!
Last week we covered really analyzing what you want in a potential acquisition. (Click Here for a refresher)
So this week we are going to look into each step from initial outreach to closing and your commitment and risks along the way.
Buckle up, this is the longest newsletter to date.
Initial Outreach and Inquiry
Last week we talked about what you needed to personally look for in a business, so I’m going to skim over that.
You should have your walk-away points clearly identified so you know a deal breaker when it comes up. You should also know what industries, services, and geographical locations you are willing to commit to.
You should know how much of a salary you need from the business. $50,000, $75,000, or $145,000- whatever you need make sure the business can comfortably cover you.
Let’s jump in.
You go to BizBuySell or Kumo (killer deal flow site, thanks Codie Sanchez) and you find a business that passes the sniff test with the overview information.
Submit an inquiry and ask some basic questions, and get an NDA completed to get access to preliminary information. I recommend getting an NDA template even if you are dealing with an off-market deal.
You will then schedule a call with the broker/seller.
Within 30 minutes to an hour on that call, you should have a better understanding if this is the right business.
If it’s the right business, move it forward in your Deal Flow Funnel. If it doesn’t meet your requirements then just politely walk away.
You don’t have to know at this point whether you would 100% buy the business.
I strongly recommend having as many of these calls scheduled so that you can begin to feel more comfortable discussing a business over the phone.
Risk Level: Low- you are spending your time only in this stage and you aren’t committing to the broker or seller that you will buy the business.
People overthink this stage and it prevents them from even submitting their interest.
Due Diligence and Financing
Did the business pass the sniff test?
Then it’s time to start diving into the details of the business.
I have a 70+ questionnaire that I start to ask in this stage and it revolves around these key components:
Financial
Assets- Inventory if applicable
The Organization- the team structure and roles
Business Ops
Marketing
Customer Service
Legal
Tech Stacks
Growth
If you want access to my checklist with the 70+ due diligence questions, The Acquisition System has a downloadable pdf you can use.
This is going to be a longer phase than the first step and that’s ok!
This is where you are going to find out if you have a business truly worth pursuing.
You should also begin to process how you are going to fund the transaction. SBA, loan, investors, personal capital, etc…
Risk Level: Low- You are still spending time and time only to vet this business. There should be no financial commitment at this stage.
Don’t allow brokers to push you to some sort of deposit at this stage.
You should be able to realistically see how you can own this business to go to the next level. It’s ok to still have questions, but you should feel like the company is a good fit to go to the next step.
Letter of Intent (LOI)
There is belief out there that a letter of intent is legally binding you to buy a business.
While there are PARTS that can be legally binding (exclusivity clauses), you can still back out without getting sued.
Work with an attorney to help craft your LOI.
LEGAL DISCLAIMER- I’m not an attorney, nor do I pretend to be. Make sure you are consulting a legal professional to verify your situation with LOI’s.
This is the step where you begin to get more committed to the company and deposits are more common.
Risk Level: Medium- You’ll see some sellers/brokers ask for a refundable earnest money deposit here. While it is refundable if the deal falls through, just be ready to make that commitment.
This is where the rubber REALLY hits the road.
You will be going to the business location, touring facilities, understanding the org chart, payroll, etc..
You’ll be putting in a lot of time at this level.
You could consider consulting with a third party to help with due diligence at this level. It helps eliminate the emotion and allows an unbiased third party to view the business.
If you would like to work with my group at this stage we can help.
You need to decide your own comfort level here.
You may feel confident in submitting an LOI with a 50% chance the deal works out. You may need 75%.
You need to decide for yourself what you feel comfortable with at this stage.
The deal can still be canceled at this point.
You are still not 100% committed to buying the business so keep that in mind.
You will need to know how funding is going to work at this point. If you still don’t have funding lined up, don’t move forward.
You’ll just be wasting time and money if you don’t know how you are going to be paying for the business.
Purchase Agreement
Congrats!
You have a signed LOI and it’s time to put the deal into a purchase agreement.
Costs are going to start occurring at this point- you may need to pay for escrow fees for the funds to be held in an account and you’ll definitely want to work with a M&A attorney at this stage.
Risk Level: Medium High- You still aren’t 100% committed to buying this business, but it’s getting there. You’ll lose some money from legal and professional fees if you back out, but that is going to small compared to buying the company.
You should know two things at this step:
You can financially complete this transaction
You are willing to assume responsibility for the business
If the answer is anything other than yes to those two things, don’t move forward.
If you would like access to the same lenders I use, The Acquisition System will have their info.
Closing Time
Due diligence is done and deadlines are fast approaching.
Risk Level: High- this is the final stage of The Deal Flow Funnel. After this step you are married to the business you just bought.
Your confidence level should be as close to 100% as it possibly can be.
You should have a realistic plan on how transition is going to go and growth strategy for the business.
Business ownership is far from a sure thing, but you should be confident in your abilities to take control of this business.
Most people never get here because they are still worried about the initial outreach to the broker.
Wrapping Up
The initial outreach is often over-stressed about. Submit the inquiry and get comfortable having these conversations with brokers and sellers.
Due diligence isn’t anything to be afraid of. You should are simply seeking to understand the business further.
The LOI isn’t legally binding, but helps secure the interest that you have in the company.
Don’t buy a business for the sake of buying a business.
Buy a business with a plan to succeed in owning the business.
Cheers,
Austin
The Acquisition System
A $150 crash course ($100 for the rest of the month) that has 6 hours worth of content dedicated to educating those that are just starting out.
Oh, and you will get a 75 question pdf that goes in-depth in my due diligence process, access to the financing companies I use, and the legal professionals I go to.
Click the link and get access to The Acquisition System.