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Growth by Acquisition

Originally published: 02.01.08 by Mike Coyne

Growth by Acquisition

Identifying and acquiring businesses takes finesse.

There are many ways to get into business or to expand an existing business. Some business owners prefer internal growth through gradually increasing sales. Other owners prefer to grow by acquiring one or more existing businesses. If you are acquisition-minded, there are several things you must be aware of in order to facilitate a successful transaction. For some businesses, low-hanging fruit may be ripe for the picking. It may happen that an existing hvacr business in or near your service area is placed on the market. If this is the case, it would not be unusual for the potential seller, or a broker hired by the seller, to contact you. However, as a successful business owner with acquisition on the mind,you will probably not be willing to sit idly by, waiting for that moment to arrive. Instead, you will want to take a more active role in finding a business to acquire. In this regard, you should ask a business broker to look for a business for you. Alternatively, if you know your competitors and their owners, you may be in a good position to determine who might be interested in selling. Consider whether

any of your competitors are owned by individuals who may be getting close to retirement and looking for an exit strategy. Additionally, look for businesses that are smaller than your own but that are well run. You may find that you’re able to acquire a good business partner as well as that individual’s business. After identifying a potential acquisition target, you need to arrange a face-to-face meeting with the owner. It is best not to be too explicit regarding the purpose of the meeting. In my experience, an offer to purchase that is made in person will be much better received than an offer made over the phone. If your inquiry meets with some interest, you should offer to have your lawyer prepare a confidentiality agreement. Under this agreement, each of you will agree to hold confidential any information that is shared by the other party. Additionally, each of you will agree to hold the very existence of your preliminary discussions confidential. Finally, I like to include a provision by which each party agrees that it will not hire employees of the other party for a period of at least six months following termination of the confidentiality term. This precludes an employee who learns of the discussions taking place from using that knowledge for his or her own benefit. Generally, the parties undertake informal discussions and preliminary duediligence during the term of the confidentiality agreement. If it appears that an acquisition is viable, your next step will be to present the potential seller with a non-binding letter of intent, in which you outline the terms underwhich you will purchase the business. Letters of intent are serious matters,and in some circumstances a party maybe bound by such a non-binding agreement. Given the legal risks associated with letters of intent, my first advice is always to approach such a letter as if it may become a binding agreement. (See my July 2006 column, Be Careful with Letters of Intent, at www.hvacrbusiness.com/coyne.) Once the seller has signed the letter of intent, you will need to spend the next several weeks completing your duediligence, arranging any necessary financing, and having formal agreements prepared. If all goes well, you will have grown your business in a matter of months rather than years. 

Michael P. Coyne is a founding partner ofthe law firm, Waldheger Coyne, located inCleveland, Ohio. For more information onthe firm, visit www.healthlaw.com, or call440-835-0600.

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