There are several steps in buying a business, and they all need to be carefully considered. Therefore, it's important you are aware of the general process, so you can ensure you are aware of the steps along the way.
This article provides you with a comprehensive understanding of the most important phases in the M&A business acquisition process, as well as advice on how to find your ideal business.
Buying a business starts with preparation. There are several things you need to do to determine if you are capable of running your own company, if there is a market for your venture, and if the right business is available to purchase.
Preparation for buying a business includes these six steps:
Analyze your own position
Detailed market research and analysis
An in-depth understanding of finance
How to select a suitable location
Choosing the right commercial premises
Site visits and meetings with the business owner
Performance history and present performance – profit, sales, and turnover should be reviewed and evaluated.
Projections for the future – forecast business performance. To get the most accurate opinion for the future business performance, you may need to speak to an accountant.
The financial situation – this represents the assets, cash flow, expenditures, and debt of the company.
Legal issues – any legal proceedings in which the business may be involved.
Reasons for sale – why is the business owner selling?
Make sure you get a clear understanding of their answer when you approach them directly.
Any upcoming regulatory changes: a business needs to know whether the government is changing the industry sector in which it operates.
Intellectual property: any intellectual property owned by the business is covered here. This is something that you can establish by speaking to the existing owners and searching trademark and patent databases.
You can get a lot of information about the business you want to acquire from your own research.
Professional assistance is required for certain details, however.
All businesses will not necessarily include existing staff members.
If your company does, then you should take some time to get to know your employees – since your success will depend on them.
Maximize your new assets.
Upon acquiring the business, you will own the assets.
This can be used to your advantage in advance. You may be able to get financing for assets you want to buy from banks or other lenders, although you would need to be clear on liabilities.
Consider franchising – you can buy a franchise with limited funds and acquire an existing business infrastructure.
Many franchisors offer opportunities for businesses to plug into an already successful brand.
Establishing your own business is not as glamorous as it may seem. It can be hard to get going and get through the development phase to the point where you can start to make some money, as anyone who has actually done it will tell you.
Does it really need to be done? Is it really necessary to spend years squandering your skills in your back bedroom or garage if you have the expertise to change the business world? Instead of buying a business that already exists and then making your mark upon it, wouldn't it make more sense to buy an existing business?
Some new business owners assume that finding an ideal business will be fast and easy.
Finding a company for sale can take time. Many potential entrepreneurs give up their search for a company because:
They did not ask the most fundamental question: Do I really want to do this? Is my partner supportive?
Do I want to take the financial risk?
Because they were still focused on their previous or current job, they did not devote sufficient time to the search.
While they were still focused on their previous / current employment, they did not devote enough time to the search.
Entrepreneurs seeking to buy a company become impatient. When evaluating a business for sale, be aware of the entrepreneur in a hurry: after a long search, you may become biased and overlook some warning signs.
No deal is better than a bad deal!
Failure to understand the motivations and emotions of the seller
It is common for business owners to be concerned about the future of the company they built, and to be emotionally attached to it. Respect sellers' accomplishments when meeting them for the first time.
Listen 80% of the time when meeting a seller for the first time to understand their motivation to sell, to learn about the fundamentals of their business, to understand their concerns, and to determine their blind spots.
It is always a good idea to ask yourself, ‘why is the seller selling?’
Understanding the fundamental drivers of the business' profitability
Businesses generate healthy profit margins for a number of reasons, which are not always clear. Brokers and sellers will often work hard to make the business look amazing, and the owner will often do earnings management to make the business appear appealing. Question why the profit margin has been increasing lately or why it is higher than the industry average.
Examine the financials closely to get a complete picture of what happened. Understand the business's financials in relation to the broader industry picture.
Understanding the cash flow characteristics requires appropriate financial and commercial due diligence.
Understand why a company has a competitive advantage (e.g. identify unique assets, capabilities, USP, etc.)
Create an action plan for the first 100 days
The success of the business is sometimes based on the reputation and network of the original owner, which is the only reason why the business has survived. A lot of businesses do not see the importance of the original owner's reputation and network.