Now, today I would like to consider some issues about buying a business. I know that this article may not appeal to all entrepreneurs as some are still in the very early stages of building their enterprises and hence still have a long way to start thinking about buying other businesses. Some entrepreneurs even like and want to keep it small and manageable – hence will quickly run away if you introduce the topic of expansion, buying other businesses etc. However, I also need to address the needs of those entrepreneurs that have worked hard and have stabilized their current enterprises, and therefore are interested in buying other businesses to achieve their bigger dreams. I need to consider those entrepreneurs who have the appetite to grow their businesses exponentially, and one of the avenues of achieving this is through purchase of other businesses.
While in many developed economies buying businesses, an action that goes under different descriptions such as acquisitions, mergers, consolidations etc. are common and happen literally every day, the same is not true in developing economies. In small economies, you might find only a couple of such arrangements in a year. The other side of this is that many small purchases of businesses go unnoticed and unreported. In this article we are going to keep it very simple. We are not going to delve into the technicalities, terminologies and complexities that humongous businesses use when talking about buying or merging with another business. We will stick to the basics so that every entrepreneur can understand. Don’t you agree with me? Buying another business is not the exclusive privilege of only big guys or investors. Small time entrepreneurs do it too.
So, what are the principal considerations for an entrepreneur when buying another business?
- The rationale for buying the business. My dear entrepreneur, you need to have a good rationale for buying another business. Don’t simply think of buying another business because you have too much money in your bank accounts, another person or business colleague or competitor is buying; your fellow shareholders or your board is prodding you to expand etc. You need to have a good and well founded reason to buy another business. This must be strategic in nature because the investment is a huge one, and if you get it wrong you will be deep under the waters. Who knows whether you can deliver yourself safely back from under the waters? Are you focusing on market share expansion, reducing competition, new technology, some product or service ranges you need, economies of scale etc.? Does the purchase make sense in terms of your objectives? Do the numbers justify the move? Can any reasonable bystander independently support your decision? Consider these issues from different angles before you jump into the process. Ok?
- Your understanding of the new business. What about your knowledge, expertise and understanding of the new business? I know that many successful entrepreneurs already have a handful of good business managers around them. It’s part of what makes them successful anyway. However, if you are buying a business that is not exactly the same or very similar to the one you have operated successfully, then you need to think twice. Let me give you an example. If you are an entrepreneur running a transport and logistics company, and your success makes you think that you can acquire a manufacturing company and smoothly run it with equal success, then you need to think twice. Alternatively, if your businesses involves keeping cows (I mean animal husbandry, ranching) at whatever level, and you now think that you can buy a supermarket chain and be as successful as you were in keeping cows, then you need to think twice. What do you know about the businesses you intend to buy? What do you know about the market, the business cycle, risks, competition, working capital and other long-term capital requirements, operating costs, profitability etc.? Are you going to only rely on information your managers or other people give you? Can you assume that the information you quickly gather about the business is the plain truth and nothing but the truth? Come on, Mr. Entrepreneur. Be smart! Otherwise, you will come back running and counting your losses, attracting satirical comments from others. It is strongly advisable to buy a business that is similar and with the same model that you have, as your chances of success are greater. However, if you feel that you get energized by going into something entirely new (I mean new industry, business model, different level in the chain etc.), I cannot stop you but just watch your steps as you proceed.
- The realities about the expected synergies or benefits of the deal. Good business purchases usually have some hidden and intrinsic benefits associated with them. The term ‘synergy’ is used often by big companies in this regard. Sometime back I explained something briefly about synergy in one of my blogs. I remember mentioning that synergy means that one plus one might be four or five. You can read more about synergy if you like to understand it better. I will not go into that here. Ok? What I’m simply saying is this. Do the so called expected benefits of your business purchase, those benefits that might not be seen on the surface, justify you buying that business? Do they make sense? Don’t let the seller of that business or your business consultant sweet talk you into signing deals anyhow. Do you understand me? Their objectives and motives are far different from yours and you need to know this. Most likely they will not be there suffering and bleeding money with you when that business acquisition goes wrong. Are the figures and calculations used to justify the benefits realistic? Are they not manipulated in any way? It is up to you Mr. Entrepreneur. My duty here is simply to point areas where you need to look deeper, or shine your eye (the Nigerian way of expressing this).
- The price you are going to pay. Now, buying another business is usually not a small thing in terms of money you are investing. I’m talking about a target that is operating normally, making profits, with a known trade name and goodwill etc. Even if you are considering buying a dying horse you could be surprised by the challenging negotiation approaches the owner of that dying horse will spring up with. Nobody wants hits below the belt or undercuts when it comes to money, because money speaks the language that everybody understands. When talking about the price to pay for that business, you need to think about the valuation method used to arrive at that price, the goodwill or premium that the owner(s) need etc. The goodwill or premium is basically the value of what you pay above the calculated value of the business (which normally reflects the value of the net assets you are buying). Goodwill is the often undocumented and unrecorded value of a business. Most enterprises are sold at a premium. Several business valuation approaches exist. I know most entrepreneurs have limited knowledge in this area. This is why you need a trusted business consultant to be by your side when you are considering buying another business. Not just a consultant, but someone who knows his game as far as business acquisition is concerned. You need to be a good negotiator also. If you are so clueless, so generous or rather opaque that you don’t mind paying zillions of money for a worthless investment or asset, that is up to you! Who will cry? At least I know that someone (the seller) in this case will go smiling into the bank, at your expense.
- Utilisation of the assets after the purchase. Again, oftentimes you will realize that you pay for the entire assets of the business you are buying. In some cases though, you can negotiate hard and only buy what you need, but this is rare and may only work where the seller is really in a very tight corner or keen on selling at whatever costs. When you buy the entire assets, you need to take a serious look at those assets. You might not need all the assets due to various reasons. Once you have identified those idle assets you don’t need, you do well to dispose them as quickly as you can. Of course, you are one who paid for those assets, so you have a good idea about their worth. The rule is simple. Try to maximize your gains on those sales and minimize your losses if you can’t avoid it. Ok? For the remaining assets, make the best use of them. Make the assets productive and consider ways of improving their productivity so that you can make some gains from that business purchase you did. If you do due diligence properly before buying your intended business, your knowledge about the assets you are intending to buy can even give you good negotiating points before finally determining what to pay. If you go blindly, you only have yourself to blame. Under common business practice, you have the right to fully understand the assets and other relevant information about the business you intend to buy, before you conclude the deal. If you have business owners or managers of the target company that deny you important information, then you may need to run back to safety and avoid the deal. Why would they do that anyway, unless there are skeletons in the cupboard they are hiding!
- Operational costs considerations pre-and-post-purchase. Your knowledge about and understanding of the cost framework is another principal consideration when buying a business, and even afterwards in managing the post-purchase time. Before the purchase, you need to enquire about and understand the cost structure of your target, so that you are familiar with it and avoid surprises once you are in. Don’t scream when you realize that some top managers earn three times what your highest paid managers in your current business earn. Don’t curse yourself when you realize that the machinery you bought is outdated and is out of production, with high cost of spares because they have to be manufactured on order. Are the costs something that you can control? Are there opportunities for cost savings? After the purchase, how do you intend to reorganize costs to enable savings and improve your business profitability? What overlapping costs can you identify in light of your old and new businesses, which you can consider reducing or eliminating? I guess the more questions you ask about the whole thing, the better your considerations and planning will be, and the better the opportunity to make your acquisition a success after all.
- Integration process. For the avoidance of doubt, I’m not referring to integration here in the context of advanced mathematics. If you happened to have done advanced math I guess you remember ‘integration’. I’m talking about integration in the context of making your businesses (the old and the newly bought) work well together and enable you realize the expected objectives that made you proceed to buy in the first place. Are you still with me? Here we are referring to the staffs, management, customers, products and services etc. How are you going to bring these together from the two businesses? Will they continue operating independently or in a joint way? I guess these both have advantages and disadvantages but you should have some cost savings by joint operation. Will you make some key management changes, or retain the status quo? Will your product or service quality, delivery and aftersales services still retain the flavor it used to have? What will your customers (old and new) feel about the integration process? Will they still stick with you or run away? Do they see the same advantages or benefits of buying that business as you see? You candidly need to weigh all these considerations when buying a business, for you to be successful.
- Possible challenges or obstacles and how to manage them. My dear entrepreneur, I believe you know that all major business decisions and steps or actions usually are not without challenges. In this respect, one of the principal considerations for you when buying a business is the aspect of obstacles and challenges. This is why you need to contemplate the obstacles well in advance and prepare for them in good time. These obstacles usually become more apparent after you have closed the deal and have taken over your new business. At this stage you may realize that a number of issues spring up. This may include communication problems, adaptation to new business models, different working cultures and styles, ownership structures, logistical issues, financing operations of the expanded business, country specific issues (where you buy a business in another country), and many others. The interesting bit of it at this stage is that you have already committed money and bought the business, so you cannot run away from the challenges. I know many people simply run away from a problem if they can. If you are already deep into the new business, you simply have to dig in your heels and face the challenges squarely like a man – no retreat nor surrender. This is where your leadership and managerial skills will be tested to the core. Success will come by if you are smart in managing these obstacles.
Well, I think I need to stop here now, or I run the risk of boring you with so long an article that may make you avoid my future blogs. I believe I have highlighted some vital considerations when buying a business. Don’t you agree with me? For those entrepreneurs with appetite in buying other businesses, you do well to consider all the above in a focused way. Don’t just run into buying another business as if the world is ending and you want to achieve something before everything comes to a full close. Be sober. Be patient. Be strategic and yet tactful. Be keen and elaborate. Be logical and yet innovative and creative. Be smart as you expand your business empire. It is your business and it has got to continue keeping you busy while you are busy at it. Safeguard your resources because poor buying decisions could cost you an arm and a leg. Invest wisely.
Have a nice and rewarding week ahead,
The Wise Entrepreneur