Setting your acquisition criteria before you start looking

Most first-time buyers start by browsing listings. It feels productive, but without clear criteria every business looks possible, and months disappear assessing opportunities that were never a fit. Writing down what you are looking for before you start is the single most useful thing you can do to speed up a search and avoid a bad purchase.

Why criteria matter

Acquisition criteria are a short written description of the business you want to buy. They do three jobs.

• They filter. You can dismiss most listings in minutes rather than hours.
• They focus your network. Brokers, accountants and business owners can only send you opportunities if they know what you want.
• They protect you from yourself. Deal fever is real. When you have spent weeks on a business, it is tempting to rationalise its problems. Criteria written in advance are a check against that.

Start with yourself

Before you describe the business, describe the buyer.

• Capital. How much equity can you put in without overstretching? Will you need to offer personal guarantees, and are you prepared to?
• Income needs. What salary do you need from the business to live on? This sets a floor on the profit you need.
• Skills. What have you done well in your career? Sales, operations, finance, technical work, people management?
• Role. Do you want to be hands-on in the daily work, or lead a team that does it?
• Lifestyle. Are you willing to relocate? Work weekends? Run a business with seasonal peaks?
• Partners. Are you buying alone, with a partner, or with investors? Each changes what you can afford and how decisions get made.

The core criteria

Once you understand your own position, set criteria for the business itself. Keep each one specific enough to be useful.

Industry

List the industries you would consider and, just as importantly, the ones you would not. Look for industries where demand is steady, customers come back, and your skills give you an edge. Be wary of industries that need licences or qualifications you do not hold, unless the business has qualified staff who will stay.

Size

Size is usually measured by profit rather than revenue. For smaller businesses, that typically means seller's discretionary earnings; for larger ones, EBITDA. See SDE vs EBITDA for the difference.

Set a range. The bottom of the range should be high enough to pay you a reasonable salary and service acquisition debt. The top should reflect what you can realistically fund.

Price and funding

Work backwards from your capital. As an illustration only: if you have $200,000 of equity and expect a lender to want you to contribute around a third of the price, your realistic price ceiling might be around $600,000 before vendor finance. Lenders' requirements differ and change over time, so test your assumptions with a lender or adviser early. Vendor finance can stretch your range; see vendor finance explained.

Location

Decide how far you are willing to travel or relocate. A business you cannot reach easily is a business you cannot manage closely. Consider whether the business is tied to a site, such as a workshop or retail premises, or can operate from anywhere.

Business characteristics

These are the features that separate good businesses from fragile ones. Common criteria include:

• a history of profit over several years, not just one good year
• no single customer making up a large share of revenue
• recurring or repeat revenue
• a team that can run day-to-day work without the owner
• a lease with enough term remaining, or options to renew
• reasonable capital expenditure needs, so profit converts to cash
• a clear reason for sale, such as retirement

Deal breakers

Write down what will make you walk away. For example: unreliable financial records, a key customer contract ending soon, a lease the landlord will not assign, or significant unpaid tax.

A worked example

Here is how a set of criteria might look for an illustrative buyer: someone with operations management experience, $250,000 to invest, and a need for at least $150,000 a year in salary.

1. Industry: business-to-business services, trade services or distribution. Not hospitality or retail.
2. Size: seller's discretionary earnings of $300,000 to $600,000.
3. Price: up to around $1.2 million including vendor finance.
4. Location: within an hour of home in metropolitan Melbourne.
5. Customers: no customer above 20 per cent of revenue.
6. Team: at least five staff, with a supervisor or manager below the owner.
7. Track record: profitable in each of the last three financial years.
8. Deal breakers: owner unwilling to stay for a handover period; financial statements not prepared by an accountant.

These figures are illustrations, not recommendations. Your own criteria will depend on your circumstances.

Make criteria easy to share

Turn your criteria into a one-page summary you can send to brokers, accountants, lawyers and business owners. Include a short line about yourself, your experience, and how you would treat the business and its staff. Sellers care about what happens after they leave, and a clear, credible buyer profile opens doors. Our article on finding businesses for sale explains how to use it.

Review, but do not drift

Criteria are not permanent. After you have looked at a dozen businesses, you may learn that your size range is unrealistic or that an industry you dismissed deserves a look. Adjust deliberately, in writing. What you should avoid is quietly relaxing criteria because you like a particular business.

Criteria decided in calm conditions are worth more than judgements made in the middle of a negotiation. Write them down first.

Think about structure too

Your criteria should sit alongside a decision about how you will own the business. Buying through a company, a trust or another structure affects tax, asset protection and how lenders view you. It is much easier to set this up before you sign a letter of intent.

How we can help

Kainos Consultants helps buyers turn a general wish to own a business into clear, realistic criteria, matched to their capital and the right ownership structure. Learn more about our business structuring service, or contact us to start the conversation.

This article is general information only and does not take into account your circumstances. Speak to a qualified adviser before acting on it.