Buying a running business
Buying a running business could significantly add to your profitability by allowing you to take advantage of new economies of scale or areas adding to your product range or services. You might be able to grow your customer base by reaching new markets or add valuable knowledge and experience to your existing team. But buying another business can be very challenging; it can even prove to be a drain on your existing financial and management resources. You must work out whether buying another business will add value to your existing business after allowing for associated costs. To be worthwhile the business you buy must bring benefits that make a real difference to your overall profits. This web briefing covers:
1. The arguments for buying another business
2. How to use an acquisition to expand your business
3. How to reduce costs and risks when buying another business
4. Common pitfalls and how to avoid them
1.0 Defining your aims.
• Buying a business can be more risky than organic growth
1.1 What are your strengths.
• How good are your employees
• How good are your management
• How good are your products
• How are your market position and market share
• What about your finances
• Do you have plant or premises
• Do you have money in the bank
• Do you have shares in your own company that can be sold
• Does your technology or production processes provide advantages
1.2 What are your weaknesses and what can you do about them.
• Is your market position unstable
• Are your finances overstretched
• Are your overheads taking too much of your income
• Do you have any management weaknesses
1.3 Analyze your opportunities and how you might be able to take advantage of them.
• Do you have a solid market position
• Do you have good products or reputation
• Do you have a capable management team
• Do you have experience in turning round underperforming businesses
• Do you have resources that could be better used
• Are your competitors open to attack
1.4 Assess the threats to your current position. How can you avoid them.
• Are you facing new and aggressive competitors
• Is your market static or declining
• Are you over-dependent in a critical area
• Are you on a particular employee or customer
• Are you subject to cost pressures that you cannot pass on to your customers
2.0 Expanding your business.
• If you integrate another business into yours both could benefit
2.1 There may be opportunities to cross-sell to each other’s customers.
• This may be difficult if the two businesses have conflicting cultures and systems
• If you sell equipment to hospitals and acquire a company that makes quick one-off sales of equipment to medical practices
• The length of the normal sales cycle customers are used to can be a major cultural factor
2.2 You could improve the public perception of your business.
• Bigger organizations can be thought by some to be more stable and reliable
2.3 You should benefit from opportunities to develop other products.
• Having more customers might enable you to introduce or develop more new products
3.0 Reducing your costs.
• You should be able to achieve greater economies of scale
3.1 You can make better use of overheads.
• It may also be possible to cut out some management salaries
• But be careful, you may be cutting out talent that your business could use
• Make savings in central functions such as finance administration and personnel
• Look for similar savings on premises distribution sales and marketing
• If your business and the target are in the same sector you can save
• Save on manufacturing or assembly facilities
3.2 The increased size of your business should give greater negotiating power.
• You should get better prices when buying in greater volume (bulk-buying)
• Ask your existing suppliers for quotes so you can judge potential savings
• You may be able to negotiate better terms from your bank
3.3 You may enjoy some of these benefits even if you buy a business in a separate area.
• You can still share some resources such as premises and distribution.
• If the product is different but the technology involved is similar
• You may be able to share production facilities.
• Remain open-minded about the kind of business you might buy
• The more closely related two businesses are je better
• More scope there will be for major benefits
• If there is no overlap buying the other business is unlikely to make sense
4.0 Diversifying to cut risks.
• Buying another business could help you limit or offset the risks in your existing business
4.1 You may want to diversify your product line.
• You may rely too heavily on one product
• Some of your products may be coming to the end of their life cycles
4.2 You might also want to consider market diversification.
• Buying another business could help you to sell to customers overseas
• Buying another business could reduce your dependence on just a few customers
4.3 Buying another business could help even out workloads, if you have a seasonal peak.
• If you mainly sell winter goods buying a company that makes summer items
• Balance your activities and improve your cash flow
• Acquiring to diversify
• Your business may be well balanced but offer poor long-term growth prospects
• Look for an undervalued business
• Companies at or near the bottom of the business cycle are often undervalued
• Businesses with underused or spare assets may offer opportunities for you
• You might be able to spot a business that would do better if it relocated
• Look for an underperforming business
• Look at the management resources to cope with turning it around
• Consider transferring effective business methods from your own industry
• Do you have experience in turning companies’ round
• Businesses underperform because of either poor management or underinvestment.
• The more successful a company is the more you will have to pay for it
• Less advantage there will be in the deal for you
• Do not overvalue the business or its potential
• Get an independent opinion
5.0 A shortcut to assets.
• Buying another business could save you time and money when building your business
5.1 You might be able to buy assets at a relatively low price.
• Buying a competitor might give you access to specialist machinery and knowledge
5.2 You might be able to acquire a good distribution network.
• Reduce the time and effort building a sales force or setting up new sales outlets.
5.3 An acquisition could also be a quick route to building an employee skill base.
• Be careful, because employees do not have to stay on after the acquisition
• Bypassing barriers to entry
• Acquisitions can be particularly useful
• Look if there are significant barriers
• Technology may be protected by patent or license
• You might not want to buy the company that owns the brand
• You might be able to buy a company that holds a license to use it
• The brand owner could still deny you use of the brand
• Your ambitions may be blocked by public policy restrictions
• You may not be able to get planning permission for an outlet
• You may be able to buy a business already operating there
6.0 Defensive strategies.
• You can use acquisitions strategically, to block your competitors or to protect your allies
6.1 If you acquire a direct competitor you remove a possible brake on prices.
• You may be able to put your own prices up or at least hold them steady
6.2 If you acquire a business that competes you may be able to limit the growth in costs.
• An agency that takes over a rival supplying IT staff
• Find it easier to get qualified people onto its books
6.3 You might consider an acquisition to protect a trading partnership.
7.0 Beefing up management.
• Acquisitions are often most useful when they bring in new blood - intentionally or not
7.1 Buying another business can fill gaps in your management team.
• If selling is your strong point an acquisition may be a good way of bringing skills
• Guiding light focuses on the short term you might be able to bring in a long-term planner
7.2 Be prepared to spend time with prospective partner.
• You must make sure your methods and objectives fit together
• People who seem to have complementary talents can have a totally different agenda
8.0 Takeover traps.
• If buying a business is going to fail it is usually because there was not enough investigation
• Agreed to a plan for what should happen afterwards
8.1 Your own business may suffer.
• Your management may be tied up with the acquisition and overlook problems closer to home
• You may well find you have increased your exposure to risk
• You may have bought neither assets you can neither use nor sell.
• It pays to make thorough checks before buying another business
8.2 The acquired business may underperform.
• Your management skills may not transfer to the business you have bought.
• Key employees might leave.
• Lock them in with a contract using bonuses linked to agreed profit targets
• Hidden problems may emerge after the acquisition
• Suppliers may raise their prices or the market might turn against the business
8.3 You may run into difficulties in achieving your expected economies of scale.
• Key staff may be unwilling to move
• Making redundancies may be expensive and unsettle those you want to keep
• Trying to merge two cultures can be a long, drawn-out disruptive process
• Make sure you allow for rationalization costs
• Calculate the benefits you expect from any merging of operations
8.4 Some acquisitions backfire spectacularly.
• Beware that buying out your competitors may not be as ideal as it seems
• Check that the sale and purchase agreement includes terms and conditions
• Prevent the former owner from setting up a similar business again
• It is important to rule out a similar new business in proximity to the one you buy
• You risk the new business winning back former employees and customers
9.0 Examining the alternatives.
• Buying another business may often look like an attractive shortcut to success
• You should also consider other ways of expanding
9.1 Build up another business from scratch.
• It may be cheaper and simpler in the long run
9.2 Sign up long-term contracts with another company.
• Rather than buying a distribution network contract it to distribute your products
9.3 Form a joint venture.
• It is often cheaper to get out of a joint venture than offload a failed acquisition
• A joint venture lets you access the other party’s management and employee’s skills