Is the entrepreneurial spirit alive in you? Buying an existing business is a sound strategy to get started. This may put you ahead of the game, since the start-up phase is a time when many new businesses fail. And it's often the only feasible way to break into a particular field, such as tourism or manufacturing, because start-up costs for these types of businesses are often prohibitive.
The key to acquiring the right business is to assess your situation, and determine what you want to gain through an acquisition.
Consider these advantages
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 key advantages, questions to ask yourself, and factors to consider before you forge ahead.
Customers:
You have an established customer base. The more customers, however, the more you will pay for business goodwill. Still, you will also have access to immediate cash flow and an opportunity to improve on existing business relationships.
Operations:
- The business has been tried and tested, so you eliminate the initial groundwork in getting the production process started.
- Operations, distribution, supplier relationships and key personnel are established, saving you time and money.
- The previous owner can provide you insight into running the business.
Product:
The business has inventory. The product has been launched and is generating a certain level of profit. This gives you an idea of what works well, and what needs to be improved in order to increase sales. You are able to allocate more money to your marketing efforts.
Employees:
Employees who have been with the company for some time can provide invaluable information and knowledge about running the business, and about the industry.
Financing:
- A proven track record and an existing cash flow make it easier to get additional financing for working capital.
- A business plan and business records are in place to guide your decisions, so you can forecast short and long-term profits.
Factors to consider
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 for sale. Then evaluate it carefully. "Due diligence" is one of the most important aspect of a business acquisition. Ask yourself 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 where you have no background. The business you buy has to mesh with what you do well, and also with your personal and business philosophy. Choose familiar territory to decrease your risk of failure.
Evaluate the risks: Determine whether this type of business has a solid chance of turning a profit by researching it carefully. Some types of businesses are more risky, vulnerable to competition, or subject to financial failure. These include restaurants, bakeries, grocery stores, dry cleaners, florists, used car dealerships and gas stations.
This doesn't mean you should automatically avoid these businesses. But it does mean you'll need to be even more critical in evaluating the risks.
Look for synergy: In acquiring a business to add to an existing business, you need synergy in these key areas:
- Marketing and sales: Products or services should be related or complementary, and marketing and sales methods should be in harmony.
- Operations: Products and services should have similar production and delivery methods
- Finance and administration: The merger or acquisition should result in improved cash flow in order to fuel additional business projects.
- Human resources: Ensure you have the cooperation of your new staff as they are key to a successful integration of the business processes. Ask yourself: what level of skills and training do the employees have? How can this knowledge improve my existing business?
Look at the identity: Every business has an image or identity, which has been built over time. Think carefully before you acquire a business with a tarnished image, as the negative perception can be difficult to turn around. On the other hand, a good reputation can be one of the most valuable attributes of a business. Consider doing an Internet search to see what people are saying about the company. Peoples' opinions may not be representative but should still be taken into account. Ask yourself: Why is this business being sold? What is the reputation of the owner and the business?
Consider the company culture: You are buying an established company that has its own business culture, management style, and relationships with vendors and partners. If you change the way things are done, you may meet resistance. Ask yourself: Does the seller have good relationships with employees and managers? What is the business culture, management style, and quality of work in the company?
Evaluate the costs: Financial records may not always reflect reality. You need to ensure that the price is in line with market conditions. If you don't do due diligence, you can pay too much for the business. You may also be burdened with the debt you incur in buying the business.
Hidden problems, such as losses, declining revenue, or marketplace changes may make the business less viable than it appears. The building lease or equipment lease may be ready to expire, and there may be price hikes. Find out if the equipment is part of the sale. If so, what is the condition of the facilities and equipment? What are their value? Is the building for sale as well? If it is rented, under what conditions can you take over the lease?
Strike the right balance: An acquisition should be feasible operationally and financially. For example, a small company should not acquire a much larger company, and a company manufacturing clothing should not acquire a company manufacturing food products.
Once you have found a business that fits your criteria, the next step is due diligence the process of fully investigating the business. 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 the parts of the business that you can't see physically or verify by talking to employees or suppliers.
Acquiring a business can be complicated, and involve skills such as assessing the value of the business, considering the tax implications, and negotiating the sale. A BDC consultant can guide you through the process. There are costs to finding and researching a business, but these costs are well worth the investment.
