Many people want to have a business they can call their own. However, building one from scratch is not easy. Because of this, many entrepreneurs are choosing to buy an existing business. But buying an existing business is not as easy as buying a used car. You must take the proper steps to ensure you get the most out of your investment. So, here are the first steps to take in company acquisition.
1. Why Do you want to Undertake an Acquisition?
Before you acquire a business and spend money, you must first establish why you are doing so. What are your motivations for buying a new company? In most cases, entrepreneurs who purchase a new business will do so because they want to expand the existing business. But your reasons should be more specific.
Buying an existing business comes with many benefits. For one, it eliminates the hassles in setting up a business from scratch, such as developing new products, building a solid customer base, and hiring staff. You also won’t have to go through the challenges during the crucial early years when many new businesses often fail.
The most common motives for acquiring a new business are diversification, R&D/Patents, leverage, transformation, scope and scale. Find out which among these drivers are your motives behind buying a new venture. Regardless of your reasons, be honest with yourself about your motives. Otherwise, you could acquire the wrong business, which could lead to many problems down the line.
2. Make Sure you Have a Strong Team
So, you are eager to push through with your plan to buy a new company. But before you do so, there are things you must do, and one of these is to have a solid team. There has to be a working group in your company with representatives from every business department. They must be able to work together and communicate well with each other.
Developing a team is not only about finding a group of people having the right mix of professional skills. You must have a strong team who are goal-oriented and share the same company values. No matter how good your business might be, it cannot prosper without a dynamic team working cohesively towards achieving a shared business goal. When hiring new employees, set expectations from day one. Set ground rules and let everyone know about your expectations for the team, not only in the short term but also in the long term.
Encourage every team member to exhibit respect towards one another. They should see one another as a business partner who will work with them towards achieving a shared business goal, and not just someone sitting at a desk beside them. Invest in employee training and online courses as it can help ensure that the team is ready to undergo the acquisition.
3. Do Your Research
When acquiring a new company, you must do your homework by gathering data and insights on your potential business venture. Do your research about growth opportunities, competitive landscapes, market trends, technology advancements, etc. The most successful business acquisitions involve market research, aside from the usual due diligence.
When doing your research, identify areas for possible expansion and find out how to expand your current offering. For instance, you can research changing market trends due to new construction projects, increasing levels of education, and other changes that will bring in new opportunities for the business.
Use the data gathered from your market research to develop new and effective strategies. For instance, see how you can improve the distribution channels and marketing mediums and find out if there are any opportunities to introduce a new product in the market. All these can help you make more informed decisions for your newly acquired business venture.
4. Know Your Business Finances
As the buyer, you have every right to know the financial standing of the business you plan to buy. Ask for a copy of the financial statement and ensure that it is prepared according to the generally accepted accounting principles and that the selling company is fairly presenting the company’s financial condition, results of business operations, and cash flows over the specific periods indicated.
Getting into the financial aspects is one of the most important steps to acquiring a new business. Consider hiring good payroll employees who can help review the seller’s business and assess the key financial indicators, which include profits, sales, expenses, debts, and cash flow. They can also identify any potential red flags and irregularities.
When reviewing the financial statements, one aspect to think about is the accounts receivable. If there are customers who still owe the seller some money during the closing date, find out who will be responsible for paying the overdue debts. Decide whether to buy the accounts receivable or let the seller collect them.
5. Do a Due Diligence
Before you purchase the business, you must know what you will get from the deal by performing due diligence. It means conducting thorough research to confirm that you are buying what you expect and not getting something you don’t want. Hire someone who can assess the value of the business and determine whether you should proceed with the purchase.
During due diligence, gather as much information about the business and determine what’s necessary to make an informed decision. There are various areas of due diligence to explore – business license, reputation, industry-specific research, etc. It also involves conducting an audit to confirm the relevant facts and financial information. Verify anything else that was discussed during the business deal.
Business acquisitions that go through a process of due diligence offer a higher chance of success. Due diligence helps the buyer make informed decisions by verifying the available information. It also gives assurance that their expectations about the transactions are factual. While due diligence may be costly and time-consuming, these are justifiable expenses compared to the risks of failing to conduct proper due diligence.