Key Considerations On Buying A Business

The purchase of a business nearly always involves the outlay of a significant amount of cash or commitment to a significant amount of debt. Either way it is critical that the purchaser captures the optimal value from the new business. This is where many acquisitions go wrong from the beginning. The purchaser hasn't planned for the integration/transition, and finds that running the expanded business, and servicing a larger debt, are major burdens that result in the value sought in the purchase not being realised.

Five key steps for success when purchasing a business are:

1. Know the true synergistic value
   
   This means that before buying any business operation, purchasers must know how much value it will add or provide in the future to their existing business. Just adding the two profit and loss statements together is not a realistic indicator.
   
   Often owners can achieve synergies or economies of scale via a purchase, such as using the same business premises, reducing staff, and better use of resources generally, but they can't assume this is the case or that it will just happen.  It pays to make sure.  Often there are also unplanned once-off costs to take into account in merging two businesses - such as unwanted inventory or redundancies. 
   
   
2. Culture is tangible
   
   Many people underestimate the value of culture and ensuring that two businesses do have cultural alignment, or cultures that can be easily aligned.
   
   There are many examples of business acquisitions, large and small, that did not work because the businesses purchased had no commonalities - no common vision, no common values and no cultural alignment. As a result the consolidation did not work and, while the concept appeared sound, in practice the vision disintegrated.
   
   Consider the business for sale - what it looks like, what it feels like. Does it fit like a glove?  Or at least, can the purchaser see, with confidence, what needs to be done to make it a comfortable fit?
   
   
3. Have a plan
   
   In our experience, too often a written working plan simply doesn't exist.  While this may sound trite, and no matter how boring it seems, it is essential that a purchaser has an integration or transition plan. This plan should plot the course of the merged business over the first 12 months (at least) to ensure the synergistic value paid for is captured.
   
   The plan should incorporate such things as meeting the newly acquired clients, motivating the new team, establishing rapport and communications and setting clear goals and targets for the next 12 months.
   
   
4. Implement the plan
   
   A plan is useless unless it is implemented.  Again, when we are brought in to help with an acquisition that isn't working, we often find that even when there is a plan, it has too often ended up in a file and never seen the light of day. At least not in a way that helped the new owners achieve their aims.
   
   It is often a good idea for purchasers to use an external party to be their coach or mentor during the integration period to ensure owners and their teams are doing what they said they needed to do according to the plan.
   
   Mentors should be given responsibility to follow up and act as a conscience, as well as authorised to see through the planning process. Having unbiased third party help and guidance increases a new owner's ability to achieve a successful result.
   
   
5. Value the business regularly
   
   After the merged or new business has been in operation for 12 months, it should be valued by the owner.  Follow up valuations should also be made on a regular and ongoing basis. This is the check, or audit, that shows whether the new owner's expectations are being achieved.
   
   Valuations also give them warning when things need to be done to ensure they are fully capitalising on their investment.
   
   We believe business valuations, as well as profitability, sales figures and the like, should be used as key performance indicators for any business. This approach also helps owners to address any emerging risks and threats to the continued profitability, or opportunities in the business's particular market or industry.
   
   Benchmarking is also an important measure of business performance. Businesses should be benchmarked against good quality competitors.  Owners can then use these high standards to strive to exceed benchmark.

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