Buying a business represents an opportunity to begin a new chapter of expansion and growth. However, history is littered with low-performance business transactions. Careful consideration, including due diligence, is essential to buy one of the UK’s 5.6 million registered businesses.
Buying a business cannot be boiled down to a single factor. Instead, you must consider countless factors beyond price, including timing, location and more. This guide discusses what entrepreneurs must consider before putting pen to paper.
What should you consider before buying a business?
Business acquisitions that look good in theory can quickly turn into nightmares without appropriate due diligence and a long-term plan to make the acquisition a success. Naturally, every merger and acquisition is unique, but some factors apply to every transaction.
Price
The price is typically the first thing a managing director examines before determining whether they’re getting a good deal. The purchase price represents one aspect, but the value the purchase can bring to an existing operation is even more important.
For example, Ken Bates purchased Chelsea Football Club in 1982 for just £1 when the club was struggling in the old second division. By the time he sold the club in 2003 for £140 million, Bates had turned the club into an elite outfit. Despite the enormous price, Bates reported making a £17 million profit on his investment.
Without that on-field success during his tenure, even the £1 purchase price could have resulted in a loss over the lifetime of the investment. In other words, investigate not just the business’s price but its potential lifetime value.
Location
Like a house, brick-and-mortar stores are all about location. While purchasing a struggling business at a massive discount may look attractive, if it’s based in a low-traffic retail park, it may not be as valuable as it seems.
Timing
Good deals can quickly turn sour if finalised at the wrong time. For example, a deal could prove ruinous without immediate results if your cash flow is questionable. Likewise, you must consider the direction of your industry and the broader economy.
Right now, soaring interest rates and general economic instability have forced many transactions to be put on hold.
Growth potential
What can you extract from acquiring a business?
Growth potential is the most critical factor in determining whether buying a business is right for you. This includes examining business turnover, profit, liabilities and brand reputation. If the numbers don’t spell out a happy ending, it’s better to walk away.
Cultural compatibility
Culture isn’t just a corporate buzzword. Some businesses operate on opposite sides of the spectrum, making bringing them together impossible.
For example, Australian DIY retailer Bunnings was forced to write off £547 million in losses after acquiring UK equivalent Homebase in one of the worst-ever British mergers. It’s widely cited that its failure came from axing the entire Homebase senior management team and 160 middle managers immediately upon the deal’s completion, leaving the UK chain rudderless and in disarray.
This is why the numbers alone cannot tell you whether a deal makes sense. Instead, you must get under the skin of any business you want to acquire.
Selling motivations
Why is the seller looking to move on from their business? Valid reasons like ill health or retirement planning can provide peace of mind, but owners looking to cut their losses can indicate critical internal issues mandating further investigation.
There’s nothing wrong with purchasing a struggling business. Many entrepreneurs have made careers out of turning these entities around, but not every buyer wants to involve themselves in these endeavours. Learning about the seller’s motivations lets you grasp precisely what you’re getting into.
Ultimately, the reasoning behind an owner’s departure shouldn’t impact a company’s ability to succeed once they hand over the keys.
How important is it to ask questions before buying a business?
Due diligence is the most crucial process in processing a merger or acquisition. It’s your chance to ask the tough questions about your target company. Owners are legally bound to provide access to the books and inner workings of the company, but they’re not required to go beyond that.
You cannot turn back the clock if you don’t ask the right questions and discover something that could dampen the deal’s value after completion. Never make assumptions or take the owner’s word at face value. Do your research and invest in the due diligence process, even if it means the deal takes longer to finalise.
The most important consideration when buying a business
Most guides list factors like the financials, the reputation and the assets you are getting as part of the deal. But what is the most crucial consideration when buying a company?
The value of a business merger depends on whether the transaction makes sense for you. Your business has its plans, goals and benchmarks for success. In practice, this means Business A and Business B could sell exactly the same product and examine the viability of buying Business C.
Yet despite operating in the same market and performing due diligence on the same business, both firms could come to very different conclusions. That’s why mergers and acquisitions must be examined within the context of your long-term goals.
How can a business broker support you in your buying journey?
Business brokers are not there purely to ensure you cover all the bases when committing to a deal. They are there to provide objective advice on whether a deal makes sense for you. Good business brokers seek to learn as much about you as they do your target company.
Your broker will negotiate on your behalf, but they’ll also work to structure transactions to enable you to reach your goals. These professionals understand the ins and outs of deals, good and bad, because of their role in supporting hundreds of transactions – and that’s where their value is.
At Hilton Smythe, our experts possess decades of collective experience supporting buyers as they seek to merge and acquire. If you need an expert to help you extract maximum value from an upcoming deal, get in touch with the team today.
