Buying a Business at the Right Time
Whether you already own a business and want to expand, or you want to break into the business world with the acquisition of an established company, there are many things to consider before you begin the process.
Purchasing an established company means you won’t have the struggle of building a business from the ground up and can work on a previously established foundation. For example, I was talking to a business owner the other day and he wanted to sell. He explained the business had been going 3 years and while it was yet to make a profit (and his reason for selling), he explained his business was worth a lot of money as it took 5 years for a new business to become established. When I went on to explain to him that 5 years is too long and very few buyers of a business are willing to buy a business not making money, we finished the conversation with different points of view. However, my position remains the same. I’m yet to find any business buyer that’s willing to pay too much money for a business that is not profitable as their preference is to start the business themselves and do things their way.
To be even-handed, keep in mind that when you buy an existing business, you could inherit some of its downside, for example, a questionable reputation or deeply entrenched operations that will be more difficult to optimize.
Factors to consider when buying a business.
When planning to acquire a business, consider whether the timing and fit are right for your company and if it will help it grow beyond what it could on its own.
Timing Is Everything
There are many points to consider when deciding if the time is right to acquire a business. You will need to evaluate your readiness on a financial and personal level and conduct market research on the industry.
Do your research to find out if your fundamental reason for buying an existing business is because you see the opportunity for growth; or as the seller likes to say, “this business has so much potential.”
How well do you know the industry?
Each industry has its own way of doing business including government regulations, training and hiring of employees, ups and downs in the economic cycle, barriers to entry by competitors, willingness of third parties to provide finance and more. Make sure these are understood if you choose to buy a business in a new or different industry.
How will it impact your current business and/or personal life?
If this is the first time or twentieth time of owning a business, your process to buy a business should be the same.
Here are exceptionally important items to consider.
- Do you have the time to own and operate your business as the buck stops with you?
- What role do you plan to play?
- Does this fit with your current skill set or are their major new skills you need to learn and how much time will these take to learn?
- Technology can quickly change an industry. Do you see major changes coming in the short-term that could disrupt your ability to be successful?
- Are you willing to make the necessary sacrifices for the business to be successful? If you are unsure, step back and only approach business ownership when you are sure.
- Have you researched the market to understand where it is in the economic cycle?
- Have you researched the competition?
- Have you researched third-party finance if you need it to make the acquisition?
- Have you checked to make sure any advisors or critical decision-makers such as board members, executive management team or investors agree or can improve your decision-making?
- Do you have time to invest in the acquisition process?
- Are you financially ready to make the investment?
- Does the reputation of the business you plan to buy match your reputation or can you adapt it to fit yours?
- Does the reward match your Return On Investment criteria?
Just as all good things in life they come with risk. At the end of the day, a successful business owner is one that has successfully managed their risk as this is the essence of the capitalist system.
For more immediate help with buying a business you are welcome to send an email to Andrew Rogerson or give me a call on 916 570-2674.