Business In Washington - Business Operations & Management Consulting

I’ve helped a lot of clients buy businesses over the years.  I’ve also been brought in after the fact to help fix problems in the businesses.  Suffice it to say that I have observed many buy/sell transactions during my career.  Buying a business and becoming a business owner for the first time is a big deal, the culmination of a dream for many.  Since it matters so much, and entails so much investment of time and dollars, it’s important to make the best purchase decision possible and be well positioned for business success.

The flip side of success is failure.  So why do some of these purchases and dreams of business ownership head south?  I typically see 3 big mistakes new business purchasers make.  Avoid these and you will have a better chance of ultimate success.

1. Paying too much.  Every business owner thinks his/her company is worth more than it really is.  This is completely understandable, particularly if the seller is the company founder.  It is his/her baby, something created from scratch and built up with passion and extremely hard work.  So, as obvious as this concept is, it constantly amazes me that many business buyers take the initial offering price and go with it.  Do your due diligence!  Research and negotiate.  Delve deeper into the financial information offered by the seller.  Maintain a healthy level of skepticism.  In the immortal words of Ronald Reagan, “Trust, but verify.”  You want to offer a fair price for the company, but if you pay way too much you risk burdening your new business with a debt load that could sink it.
2. Buying a job, not a business.  This mistake is most common when employees buy the business from their former boss.  Running a business is not the same as working within that business.  From the time you begin considering the purchase of any business, you need to shift your mindset.  Think like a CEO and look at the business from that perspective or you will not be successful leading the company.
3. Going it alone.  Sellers usually use a business broker, an attorney, or a business consultant to help them market their companies.  The buyer should also have appropriate assistance.  You are talking about spending a lot of money here, so don’t balk at spending some up front for expert help!  Viewed within the overall context of a business purchase, it’s a relatively small investment.  Don’t rely only on the seller’s attorney.  Have your own counsel.  Work with an experienced consultant to help you value the business, set a price, and negotiate the sale.  Remember Big Mistake #1.

Plan ahead, avoid these three mistakes, and your business purchase will set you up for success as an owner and CEO!

The title of today’s post is a question I have been asked many times over the years.  It generally comes from a client who already owns at least one business.  (Issues pertaining to buying one’s first business are quite different and will be addressed in another post.) 

I begin by asking a couple of critical questions.  First, does the company fit with your current business?  Consider the following:

• Does the business produce a similar product or service?  In this case, it may make sense because you are essentially buying out part of your competition.
• Is the customer base the same as yours?  This may indicate a good fit.
• Does the company bring solid repeat customers with it, thus expanding your customer base?
• Does the company make a complementary product?  One that fits logically with your offerings and expands your product set?

An acquisition will make more sense and have less risk if it fits with or complements your current business. 

The second big question is this.  What do you bring to the table that will make the company better and more profitable?  Additional profit is absolutely necessary to justify and recoup the purchase price, as well as support the debt usually incurred to make the purchase.

• Do you have ideas to enhance the business that the current owner is not attempting at present?
• Are there synergies with your business that will ultimately enhance results?  Economies of scale?
• Can you bring a needed cash infusion to an otherwise good, but financially strapped company?
• Do you bring additional industry knowledge, contacts, or management skill to the table?

Unless you can clearly articulate how you will make the company better and more profitable, don’t buy it.

Until you can answer these big, strategic questions, delving into the due diligence of analyzing the company doesn’t make much sense.  Once you have your strategic answers, however, you can proceed to look at the specifics of the business - its finances, market share, growth trends, management, etc.

Expanding your business through acquisitions is a great idea, as long as it makes sense strategically.