Purchasing any sort of business is a big step. Whether you are already used to running a going concern and are buying out a competitor to increase your market share, or taking your first steps working for yourself by buying a franchise, the decision to commit should never be taken without due diligence.
There are, after all, a number of pitfalls that you might fall into. Nevertheless, the many potential benefits of buying a business mean that progressing with a company purchase can make for one of the best investments of your life, both personally and financially. Just make sure you ask yourself the following five questions at the outset to ascertain whether the decision is the right one for you.
People buy businesses for all sorts of reasons, so this question will bring about very different answers depending on your personal circumstances.
For example, some people buy a business because they have not had success in getting the sort of job they have been seeking. They may now view running their own company as a way of proving they can succeed when others doubt them. For many individuals, buying a business is all about the challenge. Perhaps you have already run a business and built it up from scratch only to sell up at the opportune moment. If so, then building a new success from a relatively recently formed organisation may appeal to your mindset.
Of course, your motivation for buying a business may be that you can gain a greater market share whilst still running your own firm and use the newly acquired company’s client base to build your own brand into something much larger.
The point is that the idea of purchasing a particular business has a valid commercial purpose. This needs to be tangible and not something that is motivated out of boredom or the lack of other, better ideas.
Buying a business to generate a steady income may be all you are looking for, but few business people are content with this sort of view. You should be looking at what the business can offer you in the future as well as now. What is its potential in the hands of a new owner? Look at the company’s customer base and establish in your own mind how it could be expanded.
Could it, for instance, be repeated elsewhere in a new territory? Could its customer service offering appeal to another demographic? Ask yourself whether the business could branch out into other sectors, for example by adapting the products it makes or resells into new items.
Even if you don’t work out a detailed five year business plan, from the outset of any buying consideration you should have a clear idea of how to grow the business and a few strategies in mind for achieving this. Few businesses stay consistent over a five year period, they are either trending upwards or down.
Getting the right fit is not a quantitative consideration. You could set it out in a purchase proposal document fully and still have risk and uncertainties. More often that not, it comes down to your entrepreneurial gut instinct.
Having said that, there are some useful tips for thinking about how a business might potentially fit with your way of doing things.
Firstly, look at the company’s turnover and staffing costs and ask yourself truthfully whether you could handle a business of this size. Perhaps it is simply too large and complex for you to enjoy running it? All of your time may end up being occupied in day-to-day administration rather than forming new ideas and being creative.
On the contrary, perhaps it is too small and will feel like a ‘step down’ from your current position. Think about the culture of the organisation and how people will react to a new way of doing things: perhaps you can get a better fit with your personality elsewhere?
It is unlikely that you will be able to buy a business that fits hand-in-glove with your style of commercial operations and man management, so you should always look at both the positives as well as the negatives, before ploughing on with a purchase.
Making a decision to buy a business does not mean you push on at all costs. Don’t got so excited about the potential you see in a business that you are short-sighted when it comes to current performance. If it is a mature business, your offer needs to be based on how the business is doing today, not the promise of tomorrow. You may be surprised how low the owner will go, even though they will obviously want to maximise their sale price.
After all, you can always make an increased offer down the line. You may never know what the seller’s personal reasons are for the sale, so a reasonable offer, even if it is lower than the expected valuation, may be taken seriously.
When buying, check customer contracts and buyer arrangements to make sure there are no unpleasant surprises in the pipeline. Furthermore, look at mitigating your risk so not everything is tied up in one transaction. For example, you might ask for the current owner to stay on for a time or offer consultation, with part of the purchase price only being made following the successful achievement of a target.
The best business purchases bring additional value to the company being bought. However, this is usually done by evolution, not revolution. Smooth transitions tend to work best and they encourage key staff members to stay on, presenting continuity for valued customers at time of change.
Even before buying, seek to securing or extending employment contracts. Try to ensure the culture of the new team, or individual, at the top works with, not against, the rest of the staff. If relocation or redundancies are a part of the future, then try to handle them as sensitively as possible and with full compliance with employment law.
Here at Unloq we help individuals and business owners buy the right business. We help the whole way through the process, from searching to completion. Our unique place in the industry as independent experts puts us in a great position to help you find the perfect business.
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