There is a very common pitfall that business buyers fall into and the consequences can be horrible. You spend countless hours searching business for sale listings and finally find one. The seller tells you they do not do any marketing and the business has been on cruise control from many years. The more you speak with the seller and analyze the business, the more opportunities you see to grow it. While you do not have experience in the exact industry, you believe there are so many obvious ways to build the business. The seller’s asking price is high; above average multiples. However, once you factor in all these growth opportunities, it really is quite a good deal. So you move forward with the deal.
Bad, bad, bad move!
There are two glaring problems here.
- The buyer does not have direct industry experience and so their assessment is not based upon quantifiable information. They are not a believable party.
- From the outside, it is very easy to look at any business and think there are countless initiatives you can undertake to grow it. It seems so obvious – right? But that is rarely the case. Often, the seller has tried these and even if they have not; until a buyer is immersed in the business and learns the guts of its operations and the industry, any plans are just guesses.
Start With Stability
While growth is enticing and certainly you want to acquire a business with upside, having a rock-solid foundation is the only way to build a sustainable business. Measure the status quo – based upon your underwriting and assuming all things being the same, the key question to address is whether or not the business will maintain its revenue and profit levels after you take over. That is step one. All the wonderful (and sometimes hallucinogenic) ideas a new buyer has for a business will be negated if it is unstable.
Â©Orlando Florin Rosu – stock.adobe.com
If No Growth…What Happens?
While conducting due diligence, evaluate what will happen if the business does not grow. It is absolutely wonderful to dream about all the terrific things business ownership can bring. Yes, if done right and you buy a good business, very often these will materialize. But, what if they don’t?
Does the purchase price and terms make sense? Do you even want to own a business that does not grow? How easily can you exit if it does not meet your goals?
The majority of small business buyers acquire a business in a sector where they do not have a wealth of experience and that is fine. It is infinitely more important that a buyer has the core skills to operate and drive the business than having direct industry experience. As such, it can be difficult to determine the potential upside before a buyer gets in there and really scrubs the business.
You may have great plans about how to build the company after you take over. Some will bear fruit, but others may not. Analyzing the potential downside in an acquisition is more important that just considering the upside. You can always deal with blue sky and growth.
To be a successful business buyer, your approach has to be effective, realistic and practical. Don’t fall in love with the business or fall prey to your own sales job. You have to evaluate all scenarios and adopt the philosophy that stability is a top priority.
Do not dream about the upside through a false lens. Put the business under a microscope and determine whether or not it meets your needs if it remains stable.
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