6 tips to prepare for your first SMB acquisition

A common question we get from small business operators and search fund entrepreneurs is “how do I prepare to buy a business?” From the financial to the practical, there are some important steps you can take to prepare yourself for when the opportunity arises. 

1) Bolster your Creditworthiness

Buying a business is similar to buying a house, taking a car loan, or even applying for a line of credit - it involves a credit check. The bank will be looking for your credit score to be above 640, especially if you are seeking a Small Business Administration (SBA) loan, which is very common when buying a small business. If you have declared personal bankruptcy within the past 10 years, this will make it virtually impossible to receive a SBA loan or most other types of business acquisition debt. If your credit score is below 640, or you have declared bankruptcy within the last 10 years, do everything you can to build your credit. If your credit score needs improvement, take steps such as paying down existing debts, avoiding new credit inquiries, and maintaining a low credit utilization ratio. These actions can help improve your score over time and make you a more attractive borrower. This is a vital first step.

2) Build your Savings

Even though you’ll have investors backing you in your business acquisition, there is still a need for you to put up some of the money that will be required for this deal. There is no hard and fast minimum number that you’ll need to have available for the deal, but being prepared to invest an amount of money that is meaningful to you is a good rule of thumb. Typically, think of 20-50% of your liquid assets/cash. Mainshares has seen acquirers put up $25k, $100k, or even $250k+, but in each instance, the amount put forward by the buyer was personally a lot of money for them, representing most of what they had to give. This is a positive signal to investors that you are all in, and ultimately a greater percentage of ownership gives you more participation in the success of your deal. 

3) Explore Asset Protection 

As mentioned, a common type of debt financing for small business buyouts is a loan from the Small Business Administration (SBA). The name of this type of loan is called a 7A loan, and the reason for its prevalence and popularity is that it comes at attractive rates to help the business succeed and grow. It also comes with the requirement that the main borrower personally guarantee the loan against their own assets in the event that the business doesn’t work out. While default rates are low, some borrowers do work with an Asset Protection Attorney and Family Lawyers to structure their finances along with their spouse or family member to create some protection.

4) Build your Team

Small business transactions don’t happen without a team - you’ll need experts for different tasks. Exploring, interviewing, and selecting the proper professionals will make a big difference in your ability to close the deal. When evaluating who to hire, look for specialization and experience. A family planning attorney may be a useful resource for estate planning or advice on managing your personal assets following the business acquisition, but if they don’t have transaction experience, they may not be the best choice to help you get the deal done. While not used on every transaction, financial due diligence providers that can build reports such as a Quality of Earnings are also highly advisable. Mainshares has a list of providers we’ve worked with in the past and can refer entrepreneurs to. Building on the theme of the importance of specialization, it’s a good idea once you’re underway working on your credit and savings to even begin speaking with bankers who specialize in SBA loans. Give them your background and tell them about your goals, and begin to build those relationships early so when it comes time to seek a loan, you already know a few people to call. Finally, if you know buying a business is somewhere in your future, start building your network. Reach out to people that know and trust you that are in a financial position to possibly invest in the deal. The more relationships you build now to call on later, the better. 

5) Your Background, Skills, Strengths, & Opportunities

If you haven’t already been running the business you’re acquiring, it’s extremely important to consider additional skills that you may need in order to run the business effectively. You may consider taking additional training courses, taking on side projects or consulting work from businesses in the industry you’re targeting, and learning from other operators in your industry by attending Industry & Trade Association meetings and events organized by the Mainshares Operator Network. Putting together a Strengths, Weaknesses, Opportunities, and Threats analysis of the type of business you want to buy, overlapping with your own personal qualities and qualifications, will help you prepare and set you up for success on day one of your ownership. If you haven’t done it in a while, one good step would be to update your resume and even write a biography about yourself. List your major professional achievements and the skills you’ve developed to get where you are. Write down how those skills will help you achieve success in the type of business you’re targeting. 

6) Post-Close Planning & Management Preparation

When you're thinking about preparing to buy a business, be sure that you are preparing yourself to step into the role of an owner. If you have any thought that you may need to brush up or learn more skills to succeed, start reading books about management and leadership, take a course, and find people you trust who can guide you. Inevitably you will encounter leadership challenges, and how you rise to them will determine your success or failure. Start learning now. The Mainshares Operator Network is a great place to begin. Achieving success after closing a business acquisition requires strategic planning and effective execution during the transition period. Once the acquisition is complete, the new owner must focus on integrating into the existing operations while also implementing innovative strategies to foster growth. Building strong relationships with the current team, key customers, and suppliers is essential for a smooth transition. It's important to thoroughly understand the financial health of the business and set clear, short-term priorities that capitalize on the company's existing strengths. Focus on quick wins by identifying and addressing any immediate issues that can have a positive impact on the business. Establish clear priorities and communicate your vision and goals to the team to align everyone's efforts towards common objectives. Use this period to gather insights and feedback, which will inform more significant strategic decisions in the future. By demonstrating commitment, transparency, and a willingness to listen and adapt, you can get your new team fully on your side and lay a solid foundation for long-term success and growth.

Further Resources: 

• https://smartasset.com/financial-advisor/asset-protection-strategies-for-2022

• https://www.investopedia.com/articles/retirement/07/buildawall.asp

Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.