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Acquiring an Existing Business…a Sound Strategy

Guest post by: Alan Brind

Article Overview: Many people aspire to be an entrepreneur, but starting up a business is not for the faint hearted. On the other hand, buying an existing business, rather than starting one from scratch, can be a sound strategy to achieve this dream.

Acquiring an Existing Business…a Sound Strategy

Many people aspire to be an entrepreneur, but starting up a business is not for the faint hearted. On the other hand, buying an existing business, rather than starting one from scratch, can be a sound strategy to achieve this dream. One good reason is that it puts you well ahead of the game, since the start-up phase is the most common time for a business to fail. For a start-up, “time to profitability”, either months or years, is quite unpredictable. It is largely not under the control of the business owner, but rather under the control of the potential customers. Obviously during this period, the owner is not well compensated if at all, and the business operates under a high level of stress. Unfortunately the “time to profitably” is the grim reaper for many start-up businesses.

So buying a business that has already survived this gestation period can be a great advantage. Still, like any important decision, you have to think through the pros and cons of each opportunity. You need to assess your situation and determine what you can gain through each acquisition candidate.



Advantages to consider

There are distinct benefits to buying a business that is a going concern.Consider the following advantages, questions to be asked, crucial factors to consider and assistance available before you go for it.

Customers

A large and active customer base has huge value, and you should expect to pay for it. It gives you access to immediate cash flow and an opportunity to improve on existing business relationships. An established customer base can be a strong confirmation of the business model, thus a major comfort factor, and the platform on which to build your growth.

Operations

Going concerns have been tried and tested, so you eliminate the initial grunt work in getting the processes started up. Operations, distribution, supplier relationships, knowing how to reach and satisfy customers and key personnel are in place, saving you time, money and effort. Also, if the seller is motivated to stay around during transition, that can be a valuable source of experience and advice for running the business in the new owner’s hands.

Product or Service

Products or services that have been launched into the market garner their level of customer satisfaction, established market share and a certain level of profit. This gives you data on what works well, what needs to be improved and how the operation might be changed under your stewardship to increase sales and profits. It will provide you a platform to build on with greater opportunity to leverage your innovation and marketing efforts.

Employees

Employees are a rich source of experience, and those employed for many years are particularly useful to a new owner. They provide an invaluable source of information and knowledge regarding the industry, customer preferences and insight on running the business. Yes, there is a short adjustment period to a new owner, but often with proper transition planning, the potential energy and enthusiasm of the existing team is unlocked by the change in ownership.

Financing

When seeking funds for a start-up, it is usually difficult to show how this new business is going to grow and become profitable. Funding often comes from friends and family. This is not the case for a going concern. It has a proven track record and an existing cash flow. This makes it easier to acquire financing required for the acquisition and growth of the business. In addition, business records and personnel facilitate decision making and business planning, so you can more effectively plan for short and long-term strategy, operational needs and profitability.



Critical Success Factors



Stick to your knitting

Pick an industry you know well. It’s important to conduct very rigorous “due diligence” on all aspects of a business under consideration. This is one of the most important tasks of the business acquisition process. Does the business fall within your area of expertise and does it meet your business objectives? Evaluate the entire business carefully.



Form, fit and function

It’s tough to succeed in a business you don’t like or where you have no background experience. Choose familiar ground to decrease your risk of failure. Do your skills, interests and experience match the requirements for running the business? If they do not fit what you do well, forget it. Your skills and philosophies, both personal and business, need to be in harmony with your choice of business.

Risk versus reward

Sometimes you come across a business that can be revived if it’s unprofitable. But do not buy a turnaround, unless you have turnaround expertise. Make sure it’s profitable, or at least determine if this type of business has a solid chance of turning a profit by researching the business and industry carefully. Some businesses are inherently more risky, lack customer loyalty, vulnerable to competition, in the wrong location, or subject to structural failure. These include many categories of restaurants, used car dealerships, gas stations, commodity suppliers, contract manufacturers, etc.

It shouldn’t dissuade you if you are an experienced manager in the field, but it does mean you should be more critical in evaluating the risks.

Look for teamwork

Good people are critical to success in any business, but it’s the teamwork that adds synergy to make it happen. This is especially true if you are acquiring an add-on to an existing business. You need synergy in the key functional departments of the business. You need the total cooperation of the existing staff as they are key to a successful integration of the business processes. Try to assess the level of skills and teamwork and use this knowledge to improve the existing business.

Image is everything

All businesses have a public image, it may be good or it may be poor. An owner may not always be aware of the actual image his company has, but it is imperative for the buyer to know and verify. A business with a tarnished image is usually something that cannot be easily turned around. A good reputation is worth its weight in gold and is one of the most valuable attributes of a business. Do thorough research, ask around and search the web for any hint that the company may have image problems. Investigate turnover of vendors, employees and customers. Ask why the owner is selling the business. Try to assess the reputation of the owner and if the businesses image is connected to the owner’s reputation.

Don’t ignore company culture

Established companies, like countries, have their own culture, and as a buyer you ignore that at your peril. You are buying an established culture, management style, and relationships with vendors, partners, channels and especially customers. No new owner changes the way things are done on day one. You will likely meet resistance. You will need to check whether the seller has good relationships with the employees and managers. And most definitely determine the business culture, its management style, its integrity and quality.

Cost, cost and due diligence

Financial records, although essential as the first indication of business health, may not reflect reality or tell the whole story. A quick check of the financial ratios will give you metrics for assessing how well the company is being managed, but you are going to need much more to establish true fair market value. Failure to conduct adequate due diligence, will put you at a disadvantage and you will most likely pay too much for the business. You do not want to sap your resources or over burden your business with debt you incur when buying the business. So caution is the keyword here.

Off balance sheet items should be explored, as these hidden items may cause severe problems in future. Likewise unaccounted losses, declining revenue, increasing ratios regarding inventories or receivables, or changes in the addressed market may signal that the business is less viable than it appears. All important contracts need to be reviewed carefully, and look for the absence of contracts if they would be needed for your business to succeed. Check for clauses regarding change of ownership. For example, often software leases are not transferable and may need to be replaced. Input price increases could occur after the business is acquired. Make sure you determine exactly what assets and liabilities are as part of the sale. Often lists and schedules are not current. What is the condition of the facilities and equipment? What is their value? Would they be considered good collateral? Is the building part of the deal or is this an optional item? If it’s leased, under what conditions can you take over the lease?

Don’t lose sight of your goal

Acquiring a business can be complicated, and involve skills such as assessing the value of the business, determining if it is easily transferrable, understanding the tax implications, and negotiating the purchase. An acquisition should be viable, both financially and operationally.

Once you have found a business that seems to fit your criteria, the next step is the process of fully investigating the business, or due diligence.When you first show an interest in a company, you will be looking at operations and facilities, and going through financial statements. But you also need to investigate aspects of the business that you can’t see physically or just verify by talking to employees or seller.

A competent and certified business brokercan guide you through the process. Other professionals like an accountant and attorney experienced in these transactions can also help ease the burden and prevent problems from arising after a purchase. There are costs to finding and researching a business, but these costs are well worth your own careful investment, thereby easing your way to a successful business acquisition.

When you are in control of the process, buying an established business can be a satisfying experience. Market factors are such that most situations are available at very reasonable values. When well matched with the purchaser, the journey ahead is likely to be very rewarding.

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Article Tags: Buying a business, entrepreneurs, selling a business, sound strategy



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