How do you Buy a Business?

Acquisitions

How do you Buy a Business?

Dear James,

Welcome to the first newsletter of vfdnet – Game Plans for Growth.  Each month we will look at ideas to grow or improve your business often by thinking ‘outside the box’.

This month we look at How do you Buy a Business?

Kind Regards

James

The Idea

All businesses need to grow their sales, so called organic growth, however many business owners may become frustrated at the length of time or the exposure to risk that is involved.  Buying a business is one route to accelerate business growth and to improve the chances of success.  Reasons for Buying a Business include:

  • Buying a business in a different area is an alternative to opening a new trading location and building up the business from scratch.
  • Another situation could be that in order to be able to pay for acquired growth it may be beneficial to put two sets of sales through one set of overheads, therefore leveraging the purchaser’s overheads.
  • If you were considering expanding into an adjacent sector of your market, then the purchase of a complimentary business could prove successful particularly if it services a different customer base.  If the businesses fit well together then the chance of cross selling your products and services into the targets customers and vice versa should make the new combination bigger than the sum of the parts.
  • Some acquisitions may also been driven by the need to acquire competing technologies; if your business is suffering from a new form of competition could you buy a business which could position you as one of the winners?

Game Plan

Once you have decided to Buy a Business it pays to follow a set procedure.  All recent studies show that well over 50% of acquisitions fail to live up to expectations, so following a process can help put you in the successful category and help you avoid wasting hard earned funds.  Therefore consider these steps:

  1. Profile – draw up your ideal target profile.  Take into account how much you can afford through identifying the potential synergy gains or increased sales opportunities or alternatively how much funding you can secure.
  2. Search – commence your search via websites, trade associations, professional bodies and importantly current trading partners.
  3. Match – match possible acquisitions to your target profile.
  4. Meet & Assess – meet the management and assess the commercial opportunity.
  5. Review Financials – review all financial data you can get – this will indicate how well the business is currently run.
  6. Heads of Agreement – negotiate a Heads of Agreement with the target; the better this agreement the more likely it is that you will make a successful deal and also the lower the legal fees.
  7. Checking out – next check out the target, otherwise known as Due Diligence.  This part is only as good as the advisers chosen and scoping out the work to be done.
  8. Contract negotiation – use the Due Diligence to help draft the contract; as buyer you can and should seek to reduce your risks by drafting strong and appropriate representations and warranties.
  9. Consider Value – if Due Diligence or the contract negotiation process throws up new ‘issues’ consider reducing the purchase price or even pulling out.  It is better to cut your losses than to buy a business that you still having ‘niggling’ doubts about.

The End Result

Once the deal has been done and you have made your first acquisition then the hard work really starts.

Companies which make successful acquisitions follow a similar process plan to integrate newly acquired businesses into the existing business.  If you can get the new team motivated towards hitting your new budget targets you are well on the way to winning their ‘hearts and minds’.

At vfdnet we enjoy helping company owners buy businesses, particularly by assisting in the Heads of Terms negotiation – involvement which can make or break a deal and save considerable legal fees.  In addition we routinely assess what funding businesses could achieve and prepare robust financial plans and models which will stand up to funders scrutiny.  We also have good experience of using trusted advisers so that appropriate people can be brought in at the right time.

All of which adds up to reducing the risks of buying a business!

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