There are lots of guides out there on how to buy a business. It’s a process, there’s definitely a ‘right’ way to do it, whether you’re buying a business that’s currently trading or not.
So read those guides. They’ll give you facts. What I want to share with you, is some insight that I’ve gleaned from more than twenty years as an entrepreneur, and a few dalliances in purchasing businesses to expand.
Last year, we bought a competitor of ours who had run into some difficulties – we knew this because we’re always paying close attention to the other businesses operating in our sector.
But there are often signs that a business might be ripe for purchasing; people decide to sell for all kinds of reasons. And people talk. The best business transactions don’t usually take place once a business has been advertised ‘for sale’ somewhere, and the more people who know, the more chance you’ll see the price and terms change in their favour.
Deal in logic, not emotion – because there are both logical and emotional reasons to purchase businesses, but only the former will pay off in the longer term. As a business investment, is this a sound choice to make?
It always seems attractive to remove one of your competitors from the equation, but at what cost? What traction do they have and how can their customer base help you? Buying them doesn’t mean all of their customers will necessarily follow to become customers of yours.
If you’re buying a business that you’re going to continue to trade, especially if it’s faced difficulties in the past, then invest in doing some really thorough reputational research. If there are customer reviews or similar, are they good? Are they genuine? Look to independent forums where the business couldn’t have curated its own content, try to get a feel for any underlying sentiment about the business and its operations.
Look after their customers – be open, and honest. Even if you have to make decisions that are not in their favour, you can keep a degree of loyalty from them.
Whether your focus is on increasing market share, or diversifying, you’ll need a sound strategic plan that considers all of your options before you start shopping around. Consider whether acquisitions should be vertical or horizontal – are you looking to snap up your competitors or consolidate your supply chain?
I spent a good deal of time working in the music industry, where the primary difference between major record labels and independents was that the big labels owned a good portion of their supply chain. They had their own studios, producers, manufacturing plants for physical media, distribution companies, and so on.
Independent labels worked mostly with outsourced supply chains, which they often made work very well, but never had the same ability to scale. But that was fine, because they weren’t interested in scale.
Dragon’s Den style negotiations are rare, but high valuations aren’t necessarily. It’s important to keep valuations independent irrespective of how you intend to finance the purchase, but if you need to bring in external finance then shop around. Transmit Start-Ups is the leading deliverer of Start Up Loans, which can be used to help buy businesses that are already trading as well as franchises, and comes with a fixed 6%pa interest rate.
Cruicially: a business is only worth what someone is actually willing to pay for it. Don’t risk your existing business unnecessarily.