Acquiring a business

You’ve grown your company to that magic number but you are struggling to break through the glass ceiling and take it to the next level.

In the current market of uncertainty, it may seem impossible right now to win new customers. However, taking a step back to work ON your business rather than IN your business can sometimes open your eyes to other opportunities that may exist out there to further grow.

Acquiring another business can often be a better strategy to grow sales quicker compared to traditional organic methods such as further investment in marketing or sales people. Whilst the size of the business you are looking to buy will largely dictate the level of professional advisors you will need to use and fees you will need to pay, the basic principles to be considered do not really change.

Objective

Other than for quickly growing your existing business, there may be other reasons or even factors to consider as to why to buy another business. Will you be managing it yourself or keeping it as a standalone business run under existing management? Is the aim to run it for profit generated from customers or to make quick fixes before selling it on again for a capital profit? It may simply be a good business to generate cash quickly to fund growth in other areas.

Be clear on what your motives are as without clearly defined objectives, a newly acquired business may quickly start to drift and drain cash.

Sector

The obvious choice is to buy in the same sector you already know and which your current business already operates in. However, as an entrepreneur, nobody said you had to stay in the same industry and so looking at other sectors that may compliment your existing business in other ways through synergy or vertical integration may be a better option. For example, a wholesale fishmonger who is currently supplying fish and chip retail shops could benefit from buying a small chain of fish and chip shops themselves to supply to.

Sectors that are always the most desirable to invest in are those that not only have growth potential but also offer products or services that are not as yet commoditised. This is particularly important if the business has an online e-commerce presence since trying to compete on price alone with products or services that can be easily compared to others is hard work for very little return.  

Businesses that can offer a recurring revenue model are also very attractive propositions since there is less dependency on having to always find new customers in order to make a profit. Examples include gyms, bookkeeping practices and children’s day nurseries where customers pay fees on a regular basis.

At the end of the day, always know your competitor and the barriers to entry before investing in a particular sector since the weaker that competition is, the easier it will be to further grow your newly acquired business.

How to find businesses to buy

You could peruse the online listings of companies for sale being advertised through brokers. However, the best businesses to acquire are often those that are not being formally advertised as for sale.

The key is to identify the business owners that may be ready to sell.  For small businesses, social media platforms can be a good place to start to identify whether a business owner may be ready to sell. For example, a business owner that is increasingly posting updates online about all their social activities as opposed to their business may have lost interest in their business you are interested in acquiring. Maybe the owner is close to retirement age and doesn’t have any other younger family members already sitting on the Board of Directors to pass the business on to (Companies House records is a good place to check the surnames and ages of Board Directors). Alternatively, the current business owner may not have the commercial skills to take their business to the next level and so an offer to sell to a competitor may be the more attractive option for them (a Linkedin profile may provide evidence of the vendor’s previous experience).

It may require some detective work to eventually identify the reasons as to why a business owner could be interested in selling but once you have found them, those reasons can be used in your favour to negotiate a good acquisition price.

Due diligence

Once a business owner has indicated to you they may be interested in selling and are happy for you to review their financial records, there are certain things to search for during the due diligence stage to determine what state the business is in.

Signs of a strong business include high gross profit margins, significant assets that could be used as security on a loan, sufficient working capital, established marketing channels as well as a history of steady sales to name but a few.

If you are in the market to acquire a business that needs improving before selling on again, then things to look out for include evidence of poor cash flow management, low levels of marketing, an idle database, weak systems, overstaffing, low pricing or high levels of turnover coupled with low levels of profit.

The offer

An understanding of why a business owner may want to sell and how motivated they are can help to shape the details of the final offer you make. As much as possible, paying the vendor in instalments is a great outcome since not only is it better cash flow for you, but if managed well, the post acquisition profits generated from the business you have acquired can be used to fund the deferred payments for the business.

Depending on the type of business you are acquiring, you may also want to consider including a clause that makes the final payment for the business dependant on key staff staying on long enough to allow a good handover. However, be wary of buying any business that is too heavily dependent on the current owner’s style of management or personalised marketing since business performance can quickly slide if that style cannot be readily replicated or replaced.

Financing

For the wealthy, using your own money is of course an option. Avoidance of using one’s own money to fund the purchase will be the preferred option though for the more commercially astute or less well off buyer. In this case, there are essentially two main ways of funding the purchase of another business:

·     Access to third party finance; or

·     Releasing cash from the business being acquired.

Accessing finance is easier said than done in the current market from more traditional lenders like High Street banks. However, the growth of the internet has made it easier to connect with potential private investors such as crowd funding platforms, venture capital trusts or private equity companies who are always looking for investment opportunities for their capital. Private investors will typically expect a share of equity in your business in return for their investment. However, it may be possible to manufacture loan finance instead that would not require you to give up any share of ownership in your newly acquired business. Possibilities include:

·     Asset-based finance where assets owned by the business being acquired can be used as security for the loan; or

·     Vendor finance where deferred purchase payments for the business are funded by future generated profits and cash flows.

After the deal has been made

The first 24 hours are crucial to ensure control of the business acquired is quickly transferred. Informing the bank about the change in ownership should be the priority so that all bank account movements are closely monitored. Banking passwords should be changed and company credit cards should be destroyed for departing staff.

The next 100 days is then key for implementing your preferred strategy for the business. Dependant upon your reasons for buying the business, this may include an upgrade of systems, reallocation of spending, implementation of new automated marketing methods to grow sales or a restructure of assets that could be used as security for further borrowing. You may want to update selling prices or even move away from selling particular products and services that are unprofitable. A change of business ownership may also mean a change of culture for existing employees and so it may be necessary to introduce incentives to keep existing staff motivated during a period of uncertainty.

Conclusions

Compared to more traditional organic methods, growth can often be achieved more quickly through acquiring other businesses and so this strategy should always be considered as an option. Whilst the current market conditions over recent months have been challenging for many, for entrepreneurs or businesses with access to spare capital, it has never been a better time to buy.

With a passion for helping SMEs to grow and the experience of working in a variety of e-commerce, retail and distribution businesses within the fast moving consumer goods sector in particular, I decided to set up Fluid FD Limited to offer my experience and support on a part time or interim basis. For a free initial chat about how I may be able to assist you in your business, either message me on Linkedin or email me directly at [email protected].