Why acquire an existing business?

Why acquire an existing business?

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June 13, 2010

Why acquire an existing business?

Growing your business internally can be a sluggish and high-risk strategy in a fast-moving business world. That's why many entrepreneurs choose instead to acquire an existing firm.

This strategy eliminates many of the headaches involved in getting a start-up off the ground, such as developing products, hiring the right people and building a sound customer base. It also gives entrepreneurs a jump on the start-up phase — a time when many new businesses fail. Often, it's the only feasible way to break into a particular field, such as tourism or manufacturing, since start-up costs in these sectors can be prohibitive.

There are distinct benefits when you buy a business that is already up and running. However, you may also be acquiring someone else's problems. Here are some other key points to consider.

Customers

If the business you are eyeing has an established customer base, you will pay more for "goodwill" when you buy the company. Still, such a firm will also give you better access to immediate cash flow and a chance to improve on existing business relationships.

Operations

If the business has been fully tried and tested, you can eliminate the groundwork involved in getting it up and running, since operations, distribution and supplier relationships, not to mention key personnel, are already in place. All of this saves you time and money, and the previous owner can often provide useful insights on running the business.

Product

The inventories in an established business and the profitability of its product line can alert you to what works well and what needs to be improved in order to boost sales and free up resources for marketing

Employees

Workers who have been with the company for some time can provide insights into the business and industry as a whole.

Financing

A proven track record and existing cash flow make it easier to obtain additional financing. Also, when buying a company, its business plan and records are already in place to help guide your decisions, allowing you more easily to forecast short- and long-term profits.

Some additional tips

Stay in the area you know

Don't fall into the trap of buying a particular business because it seems like a sure thing. Pick an industry you know intimately and look for a business in that industry that is for sale. Then evaluate it carefully. "Due diligence" is one of the most important aspects of a business acquisition. Think carefully about whether the business falls within the scope of your business plan and area of expertise.

Look for the right fit

Evaluate your skills, interests and experience. It's much more difficult to succeed in a business you don't like or in which you have no background. The business you buy has to mesh with what you do well, and with your personal and business philosophy. Choose familiar territory to reduce the risk of failure.

Evaluate the risks

Determine through research whether this type of business has a solid chance of turning a profit. Certain types of businesses are riskier, more vulnerable to competition or prone to financial failure than others. None of this means you should automatically avoid such businesses. However, they do require an especially careful evaluation of the risks involved.

Look for synergy

If your goal is to acquire a firm to add to an existing business, you will need synergy in key areas. Its products or services should be related or complementary to what your existing business already sells, and marketing and sales methods should likewise be in harmony. Production and delivery methods should also be similar, and the merger or acquisition should result in improved cash flow with which to fuel additional business projects. You need assurance that you will have the full cooperation of the new firm's staff as they will be key to a successful integration of the two businesses. Ask yourself what level of skills and training the employees have and how their know-how can improve your existing business.

Look at the firm's identity

Every business has an image that has been built over time. Think carefully before you acquire a business with a tarnished image, as such perceptions can be hard to turn around. Conversely, a good reputation can be a critical asset. An Internet search can allow you to see what people are saying about the company. These opinions may not be representative but should still be taken into account. Ask yourself why the company is up for sale, and ask about its reputation and that of its current owner.

Consider the company's culture

You may meet resistance if you buy an established company with its own business culture, management style and relationships with vendors and partners, and then change the way things are done. It's worth asking whether the seller has good relationships with employees and managers, and assessing the business culture, management style and the quality of work done by its employees.

Evaluate the costs

Financial records may not always reflect reality. You need to ensure that the price is in line with market conditions. Without due diligence, you can end up paying too much and be left burdened with unnecessary debt. Hidden problems, such as losses, declining revenues or changes in the marketplace, may make the business less viable than it initially appears. If leases for facilities or equipment are about to expire, for example, price hikes may be in the offing. Determine whether the equipment is part of the sale. If so, what condition is it in and what is it worth? Is the building for sale as well? If it is rented, can you take over the lease, and under what conditions?

Once you've begun your due diligence, don't limit yourself to examining operations and facilities or going through financial statements. You also need to investigate the parts of the business that you can't see physically by talking to employees and suppliers. Evaluating the business's true worth, considering all tax implications and effectively negotiating the sale are also important steps. Here, a BDC consultant can guide you through the process. Finding and researching a business to acquire can be a time-consuming and costly exercise. But sometimes, it's well worth the investment.


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