Buying another business, in your industry or a related industry, can help you to scale up or grow your business quickly. You can reach a larger audience for your product or service, by tapping into the new customer base. You can take on new team members with experience and skills. You can acquire new technologies or consolidate systems which will make your whole operation more efficient.
I was made redundant just as I was preparing to work after my second daughter was born. A friend and I set up our own accounting firm, but we didn’t have many clients. We looked at acquiring other accounting firms or fee bases, but they weren’t a good fit to suit our values and our lifestyles. We bought into my current firm, and suddenly I had enough clients to pay myself a salary and time to build my networks for profit growth.
What to Look For
There are a lot of considerations when buying an existing business, some of which may be unfamiliar if you grew your existing business organically. Remember that you are buying the business as it is right now. If you are looking at growth potential, then also look at how long that growth will take and how much extra investment is needed to get there. Consider whether the investment will save you the effort of growing organically.
Take a look at the past three years’ profit and loss and balance sheet, ask questions of the owners. Spend time in the business, watch how the team operates, look at the layout and state of equipment and fittings. Review key contracts with customers, landlord, employees and suppliers.
Culture and Synergies
Is the new business compatible with your existing one? Can you run both? Merge them together? Or keep them separate and hire a manager for one of them?
What is the people culture like? Are they like us, with similar values and purpose? If the culture isn’t similar, then you may have several employee leaving before you can build a cohesive team.
What are the systems like? If you take the best system of both businesses, can you transition the other business smoothly? Can you make savings on administrative and management roles, without impacting on productivity and the customer experience? Can you provide a better end-to-end experience for your customers because of the business acquisition?
Businesses are often sold at a valuation, calculated as a numbers of years of expected profit (EBITDA, or earnings before interest, tax, depreciation and amortisation). If your industry uses a multiple of 3, that means that you will usually pay three times the cash profit, excluding finance costs and tax which may vary. Comparing EBITDA can be a bit tricky though, especially for family businesses, so take a closer look at the Profit and Loss report. Is the shareholder salary comparable to a ‘market’ salary for the work the person does? Are they putting through extra expenses for tax purposes like home office costs? Consider entertainment, travel, vehicle costs, donations which can be discretionary expenses. Are they paying a lower rent because the building belongs to family?
Don’t just look at sales as a number, but consider the lifetime value of customers. Are you going to get repeat sales from the customers? Also, look at the sales trend over time. Is the business declining or growing, and why? Are you buying a business or just buying wages for yourself?
Look at the strength of the balance sheet – especially the assets. Look at the quality of the stock. Look at the asset depreciation schedule and compare it to the equipment you see. Don’t buy any damaged equipment or expired stock. You usually won’t be taking over any liabilities of the business except for holiday pay, but make sure that your agreement reflects that.
If you are borrowing for the purchase, your bank will want to see cashflow forecasts. Can you predict what the next years’ cashflow is going to be like? What is the cost of funding the investment?
Review the key contracts of the business: with customers, landlord, employees and suppliers and consider your reliance on them. Imagine if you lost a major customer or supplier, your landlord decided not to transfer the lease to you, the store manager decided to move to a competitor. Do you have legal means to deal with this, or can you cope with the loss?
The exiting owner
Often the exiting owner will offer a work-in period, where they work paid or unpaid, to help you transition into the business. Whether you keep them on as an employee after that is your choice, but then you should agree appropriate duties, pay and conditions. Make sure the exiting owner signs a non-competition restraint of trade for a suitable period, set of activities and geographic location.
Buying another business can give your business a quick growth boost. Make sure the numbers stack up, that you have the time, resources and energy to combine your new business with your existing business. You need to take the time and effort to inspect your target business before you buy and evaluate whether it is a good investment. Consult with your accountant, banker and lawyer before you sign up to a business acquisition.
You can find out more about how Serena helps her clients by heading over to her website: https://www.jdw.co.nz/about_us/our_directors/serena_irving