An entrepreneur, must ensure purchasing a business is the right strategic decision for your company. Acquiring another business can help your company grow and diversify by giving you an established client base, eliminating a competitor or providing access to new products, equipment and markets.
But buying a business might not be the right decision for every company. You might be better off growing your current business, rather than acquiring a new one. Business acquisitions are also much more successful when they are part of a well-structured process. Businesses that implemented a structured approach when buying another company were 94% more likely to be high-growth firms three years after the acquisition according to a recent study.
Here are four essential questions entrepreneurs need to answer when considering a purchase.:
1. Does the acquisition make sense?
Don’t buy a business just because you can. You need a clear vision of what you expect your company to achieve in future years and how an acquisition will help you get there.
Does an acquisition make more sense than internal expansion, licensing, franchising or a joint venture?
Have a clear vision of what you want to achieve with an acquisition, how you value the acquisition, which employees you want to retain, and how to integrate both businesses.
Tip: Avoid impulse buying. Your accountant, business adviser and banker can all help you decide whether an acquisition is the best route for your business, given your overall strategic plan.
2. What will the impact be on your business?
Acquiring a company creates financial obligations and operational changes that can drain your cash flow in the short run. If those changes aren’t properly handled, they could cause your company to spin out of control. Once you have a shortlist of potential acquisition targets, it’s a good idea to simulate how different scenarios will impact your company. You should also shop around for financing to establish a structure that allows you to reinvest in the business you’ve just acquired. Every acquisition will be different, but experts generally advise entrepreneurs to find a mix of financing, which can include seller financing, term debt, mezzanine and minority equity.
Tip: Proper planning helps you evaluate the impact of an acquisition on your working capital and allows you to properly structure your balance sheet.
3. Do you know what you’re buying?
Shopping for a company is like shopping for anything else: Buyer beware. An acquisition target could be cooking its books or dealing with lawsuits. Financial records do not always reflect reality. Many entrepreneurs later realize that they overpaid for the company they bought.
Investing in a proper due diligence process should ensure a fair price. Since the value of a business is typically based on a multiple of earnings before interest, taxes, depreciation and amortization (EBITDA) and the outcomes of any adjustments, the due diligence process will also help negotiate the appropriate purchase price.
Tip: Do your homework on the business you’re buying by conducting the due diligence process. Find out why the owner is selling the business, who are its employees and what the trends are in the industry or region where they operate (if they are different from your own).
4. Is your business ready for an acquisition?
Studies have shown that most mergers do not achieve the synergies expected following an acquisition. Part of the issue is that entrepreneurs often think exclusively in terms of what they can afford, without thinking about the integration process. A formal post-merger integration will help meet the objectives motivating the acquisition by putting in place a proper project management structure to integrate the two businesses. The first 100 days of the integration process are crucial to securing the expected benefits of the acquisition. Having a detailed plan listing what needs to be integrated and how to do it will help you focus on the most critical elements of the process, right from the start.
Tip: Technology can help you work smarter. Formal, system-based workflows will make your life easier when the time comes to integrate a new business.