Roughly 10,000 existing businesses are sold every year in the U.S. If you’re in the market for a company, plenty of options are available.
Acquiring a business is an excellent way of breaking into the world of entrepreneurship instead of starting a brand-new business from scratch. If you’re already an owner, a business acquisition can be an opportunity to expand into new markets or industries.
However, buying a company isn’t like buying a house or other big-ticket item. Get it wrong and you could end up losing a lot of money.
To increase your chances of closing a smart deal, be sure to avoid the following mistakes:
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1. Acquiring a Business Without a Solid Reason
There are myriad reasons anyone might want to acquire a business. What’s your reason and does it make business sense?
Believe it or not, there are people who buy companies simply because they can afford it. You might have heard or read stories of large corporations paying top dollar to acquire startups, only for those acquired companies to be shelved soon after.
While large corporations might have boatloads of cash to blow on senseless acquisitions, small entrepreneurs don’t have that luxury. Don’t purchase a business just because it’s trending or up for sale at an irresistible price.
Evaluate what you intend to do with the company and establish whether it will help you fulfill that mission. For example, if your goal is to establish market dominance, will the company you’re looking to acquire add to your market share?
2. Rushing Through Due Diligence
Buying a business is a multi-step process that involves a lot of paperwork and due diligence. As a prospective buyer, it’s your responsibility to investigate the business you’re buying and verify that everything checks out.
Don’t just focus on ownership, registration, and licensing details – that’s the easy part. Pore through the financial statements and get a clear picture of its performance. Does it have debts? If so, what are their terms?
Look at the tax returns for the past couple of years. If the financial information isn’t adding up, the tax documents will help set the record straight.
Other important things to add to your due diligence checklist include material contracts, customer databases, employee information, intellectual property, and other intangible assets and legal issues.
If doing due diligence is starting to sound like a lot of work, it’s because it is. You’re mistaken if you’re thinking it’s something you can do on your own.
You need a business acquisition team that includes accountants and business attorneys. You can get an attorney on demand if you haven’t already.
3. Overlooking a SWOT Analysis
Every business has its strengths, weaknesses, opportunities, and threats.
When you’re buying, it’s easy to focus on the strengths and opportunities and overlook the weaknesses and threats of the company. That’s how you’ll end up buying a company that’s only attractive on paper.
Typically, the seller will provide you with their SWOT list, but that isn’t all you need. Dive in further and assess how each weakness and threat affects the businesses. Plus, market conditions change from time to time, so it’s possible that the seller will give you a SWOT list that’s no longer valid.
It’s your job to find new weaknesses and threats. For example, if you’re purchasing a cryptocurrency exchange company, look into the regulatory environment. It might be favorable right now, but what if future changes affect its operations?
Entire industries have collapsed after regulatory changes, so it’s not unfathomable that you can buy a business that won’t have the legal standing to operate in a few years.
4. Keeping a Fixed Mind
When you’re hot for a business acquisition, it’s, of course, good practice to narrow your options. But that doesn’t mean you go into the market with only one option in mind. With this mindset, you’ll lock out yourself from potentially better deals.
Yes, there are instances when you’ll step into the market to buy a company because it’s been your target for a long time and it’s just been made available for sale. However, if you’re a speculative buyer, have a couple of options to start with.
For example, if you’re eyeing a fast-food restaurant, ideally you want to have about three options that are on sale. Do due diligence for all of them, compare their valuations, and settle on the one that offers the best value – keeping other factors constant.
In fact, having multiple options on the table can give you an advantage during negotiations. Some sellers might be more inclined to lower their asking prices when they know there are other businesses competing for your attention.
5. Failing to Plan for Transitional Challenges
In a perfect world, acquiring a business would just involve a change of ownership and all operations would go on as normal. Unfortunately, the world is far from perfect. An acquisition can lead to a chain reaction of unprecedented proportions.
Perhaps you’ve seen companies descend into operational chaos once there’s new ownership. Employees can quit en masse in protest if they don’t like the new ownership or how the sale was conducted. Key clients can take their business elsewhere if the operational disruptions aren’t arrested quickly.
When you’re buying a company, don’t only focus on closing a good deal. Think of the aftermath and plan for it.
If there’s word that the company’s employees are against your ownership, perhaps you’re better off walking away from the deal. Otherwise, put in place a competent transition team to ensure operational continuity after the sale.
Business Acquisition Done Right
Resolving to buy a business is a smart move, but a lot will depend on how good of a buy you make. It’s a complex process and many first-time buyers are prone to mistakes that can be costly. With this guide, you’re primed for business acquisition success.
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Last Updated on May 18, 2023