There are many advantages to buying an existing company rather than starting one. First, you avoid many of the ills associated with starting a company from scratch, such as those caused by new product development, hiring staff, and building a customer base.
You also avoid going through the crucial first years that are often fatal to new companies. It can also be an excellent way to break into areas where start-up costs are high, such as tourism and manufacturing. Ask yourself the following six questions to make sure you’re buying a profitable company. Despite these advantages, existing companies are seldom flawless. Ignoring their flaws can lead to a host of problems. Here are six questions to ask yourself to make sure the proposed acquisition is right for you.
Why do customers appreciate the company?
A company with an established client base can be more expensive to purchase, but it is not necessarily bad. You inherit the company’s “company background,” giving you easier access to cash and building on relationships already established with customers.
But to make sure a company is worth your time, you need to find out why people do company with it.
- Is it for its quality products or its excellent service?
- Is it for its experienced and professional employees?
- Is it for the relationship between the customers and the owner?
- Will a change of ownership make a difference?
Market research can explain how customers perceive the company’s products, services, and overall brand.
Think carefully before acquiring a reputable company, as it can be challenging to change flawed perceptions. Ask yourself why the company is for sale and find out about its reputation and its owner.
See what people are saying about the online company. It may not represent the big picture, but you will get a good idea of what inspires the company and what needs to be done to change negative feelings.
The product or service is unique in the market?
If you target a company in an industry where competition is intense, probe deep to find out how the company stands out, as this is a key reason customers are loyal (see above).
If there are no apparent distinguishing features, think about what you can do to stand out from the crowd and the efforts and costs involved.
What does corporate culture look like?
Take a look at the company’s culture, management style, quality of work, and the relationships that the seller maintains with employees and managers. Check whether these aspects correspond to your philosophy and whether it is worth making changes to them. Rapid change after an acquisition can cause resistance from employees, suppliers, and partners.
Long-term employees are a great asset. They know the company, the products, and the processes. Also, they can provide company and sector information. If staff turnover is high, question the cause. Is it due to competition within the sector? Is it because of the corporate culture? Is this linked to the aging of the workforce? The answers to these questions will give you an overview of the challenges or needs in human resources.
Do you know enough about the company or the sector?
Do not fall into the trap of buying a company in a field that is unknown to you because it seems to you to be a “safe deal.”
It is much more challenging to succeed in a sector where you have no experience or interests you little. Evaluate your skills, interests, and experience, then make sure the company matches this insight’s results. By choosing a known territory, you significantly reduce the risk of failure.
Will this new company integrate with the companies you already own?
If you want to expand your company by acquiring, you will need to seek synergy in key areas.
- Its products or services should be related or complementary to your current offer.
- Marketing and sales techniques need to fit in with each other.
- You will also need to harmonize production and distribution methods.
You will need to integrate the new company staff into your existing activities and plan to deal with potential redundancies.
It may be useful to start thinking about the integration plan during the due diligence process. Your evaluation must go beyond simple accounting to also take into account your strategic objectives.
Are there any hidden costs?
Hidden issues can make the company less attractive than it initially appeared. For example, if the lease for facilities or equipment expires soon, you may have to incur unforeseen expenses. By doing proper due diligence, you can uncover these problems and avoid costly oversights that can get you into unnecessary debt.
Once you have started the process, do not restrict yourself to examining activities and financial statements. It would be best if you also spoke to employees and suppliers to assess the company’s fair value. Buying an established company can be a challenge, but it is the best way to own your own company.
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