The evaluation process takes places in successive stages or filters as you progress more deeply into the deal. At any point along the way that you feel uncomfortable with the deal, you should not go through with it. However, be aware that even in deals that go through, extensive problem-solving is often required in order to complete the deal.
The filters are as follows:
Filter 1: Initial information provided by your broker (Filters initial lead pool from hundreds or thousands to about 50 leads)
Filter 2: Initial data from the broker after a confidentiality agreement is signed (allows you to weed out all but about 25-30 leads, approximately speaking)
Filter 3: Information obtained from visit to the company and preliminary due diligence (provides you with means to reduce lead pool further to about a dozen target companies)
Filter 4: Response to your letter of intent by the seller (provides you with means to reduce leads further to about 3-5 target companies)
Filter 5: Results of Formal Due Diligence and final negotiations for the purchase agreement (Narrows your search from several down to the one company you actually buy).
As each lead comes through, it is subjected to these different filters. A lead may drop out at any stage in the screening process, with only one making it all the way to the end of the search. However, you should keep your lead flow going, and continue to screen new leads until you have actually closed the deal. The evaluation process may turn up information at any stage that deters you from making the sale, and you are far more likely to resist a bad purchase if you have other deals in the pipeline. An understanding of this process is also helpful in budgeting the amount of money you will need in your search. Ideally, you want to have ample funds to visit a few dozen companies, and to carry out formal due diligence on at least three or four companies before finalizing the deal. Of course, you may get lucky and find a company with less effort, but that is the exception rather than the rule.
This article is an overview of step eight that is explained in further detail in “How to Acquire the Right Business” by John Psarouthakis and Lorraine Uhlaner; Published by Xlibris, 2009. This book covers the 15 key steps involved in the complex and demanding process of buying the right business. It includes the search, selection, evaluation, pricing, negotiation, closing and managing the start of an acquired business. Buy this book.