Key considerations when buying an existing business
Buying an existing business has many benefits over starting from scratch.
For one, it eliminates many of the headaches involved in getting a start-up off the ground, such as developing new products, hiring staff and building a customer base. You also avoid those crucial early years when many new companies fail. And it can be a good way to break into fields with high start-up costs, like tourism and manufacturing.
Despite the benefits, existing businesses are rarely perfect, and overlooking their faults can lead to a host of problems.
Here are six questions to ask to make sure a potential acquisition target is right for you.
1. Why do customers value the business?
A business with an established customer base may be more expensive to buy, but this isn’t necessarily a bad thing. You’re inheriting the company’s "goodwill", which can come with better access to immediate cash flow and existing customer relationships you can build on.
But to make sure a business is worth your time, you’ll want to find out why people buy from them.
- Is it great products or top-notch service?
- Experienced and professional employees
- Is it the customers’ relationship with the owner?
- Will a change of ownership change that?
Market research can help give you some insight into how clients view the company`s products, services and overall brand.
Think carefully before you acquire a business with a damaged reputation, as this can be hard to turn around. Ask why the company is up for sale and ask about its—and it’s owner’s—reputation.
See what people are saying about the company online. It may not be representative of the full picture, but it will give you a good glimpse into how the business is perceived and what needs to be done to change those negative feelings.
2. Is the product or service unique in the market?
If you’re targeting a business in an industry that has lots of competition, probe further to find out what the company does to differentiate itself, as this is a key reason why clients will keep coming back (see above).
If there is no obvious differentiator, think about what you would need to do to help set yourself apart as well as the effort and cost involved in doing so.
3. What’s the company culture like?
Carefully observe the company’s culture, management style and the quality of the work it does, as well as the seller’s relationships with employees and managers. See if they align with your personal philosophy and whether it’s worth making any changes. Remember that rapid change following an acquisition can be met with resistance from employees, vendors and partners.
Long-standing employees are also a big plus. They know the company, the products and the processes. And they can offer insights into the business and the industry. If turnover is high, ask yourself what is the cause. Is it competition within the industry? The company culture? An aging workforce? These questions will give you insight into any human resources issues or needs.
4. Do you know enough about the business or industry?
Don't fall into the trap of buying a business in an unfamiliar field because it seems like a sure thing.
It's much more difficult to succeed in an industry in which you have no experience or little interest. Evaluate your skills, interests and experience, and make sure the business matches those attributes. Choosing familiar territory greatly reduces the risk of failure
5. Will this new business “fit” with any existing businesses you have?
If you are growing your business through acquisition, you will need to look for synergy in key areas.
- Products or services should be related or complementary to what your existing business already sells.
- Marketing and sales methods need to mesh well with one another.
- Production and delivery methods will need to be harmonized.
- Staff from the new firm will have to be integrated in your business, and you will need to have a plan to deal with potential redundancies.
It can be a good idea to start thinking about the integration plan during the due diligence process. In this way your evaluation of the company will go beyond pure accounting to also take account of your strategic goals.
6. Are there hidden costs you are missing?
Hidden problems can make the business less attractive than it initially appears. If leases for facilities or equipment are about to expire, for example, you could be facing unanticipated costs. A proper due diligence will allow you to uncover these issues and avoid costly oversights that can leave you burdened with unnecessary debt.
Once you've begun your due diligence, don't limit yourself to examining operations and financial statements. You also need to talk to employees and suppliers to evaluate the business's true worth.
Finding and researching a business to acquire can be a time-consuming and costly exercise. But, well done, it can be well worth the investment