With a reported 60% of small and medium-sized Canadian business owners being 50 or older, it is expected that the supply of businesses-for-sale will increase in the coming years. Buying an existing business can have many benefits over starting from scratch, but overlooking the faults of an existing business can lead to losses and headaches. Our own David Laycraft recommends the following if you are considering an acquisition:
“Buying an existing business can help eliminate many of the issues faced with a start-up, such as developing new products, hiring staff, building infrastructure and growing a customer base. You can also avoid the losses and heightened risk associated with the start-up phase. However, some of the questions to consider in determining whether an acquisition target is right for you should include:
Do you know enough about the industry?
It can be very difficult to succeed in an industry in which you have no experience or little interest. Make sure you understand and accept your own strengths, weaknesses and experiences, and that there is alignment with the business you are targeting.
Why do customers buy from this business?
Customers can frequent a business for many reasons, including quality, price and/or service levels provided by staff.
An established customer base is often an important component of the “goodwill” of the business. Goodwill is often a function of the cash flows the business is able to generate, and the repeat business from an established customer base can be a significant component of the total value of the business; it can also provide access to immediate cash flow and relationships that you can leverage going forward.
Market research, surveys and online reviews can be important activities in identifying and measuring the quality of the customer base during your due diligence. And finally, your research should ensure that an ownership change won’t impact these customer relationships.
What is the company culture?
Your due diligence should include observing the owner’s relationships with staff and managers, while gauging how they align with your own management style. Remember that rapid change after an acquisition can be met with resistance (or worse) from employees and other stakeholders. Long-tenured staff are generally a good sign of a favorable culture – these employees know the business well and can often provide insights that are invaluable. Conversely, if turnover is high or a significant portion of the staff is nearing retirement age, these are red flags that need to understood and factored into your decision making.
Could there be hidden costs with the purchase?
Issues such as worn equipment, managers due for large raises or bonuses, or an archaic IT system can all require large expenditures once the deal closes – and if not factored into the pricing, can result in overpaying for the business. Most of these items can be identified during your formal due diligence and addressed appropriately.
How will this acquisition fit with your existing business?
If you are wanting to grow your existing business through the acquisition of a competitor or a supplier, you will also need to consider any potential synergies that could be achieved in areas such as marketing, sales, production, administration and other back office functions.
Planning for the integration of the two businesses, both functionally and strategically, will be an important success factor for the acquisition, while also providing a strong return on investment.
Other suggestions for avoiding delays and improving your probability of success with an acquisition include:
-Investing in professional due diligence;
-Involving your bank early in the process;
-Having your lawyer prepare a robust set of representations and warranties as part of the purchase agreement; and
-Creating a detailed transition plan – including roles, responsibilities, budget and timing – to implement once the deal closes.”