How to Buy a Business Successfully

There are plenty of stats around about how risky it is to buy a business. My favorite is that 74% of business acquisitions destroy value. I’m not sure which ones are entirely accurate but I know as a fact that many business purchases don’t go well!  

However, I remain a great fan of buying businesses as a way of growing and developing yours. Some of my, and my clients’, greatest successes have involved buying other businesses.  

In truth, most of the reasons that some acquisitions destroy value are avoidable. So, here is a great set of rules and principles that, if adhered to, typically led to successful acquisitions: they type that can not only grow your existing business but actually multiply it and add massively to its quality and capabilities.

Before we get to the detailed rules though, there is one underlying principle that I believe is absolutely vital. DO NOT start with an acquisition strategy. Buying just for the sake of getting bigger is incredibly high risk – the possibility of misalignment between your business and the target simply too great. Instead, be sure to have a very clear definition of your overall business strategy first. Then, if there are acquisitions that can help deliver that strategy or even accelerate it, brilliant…go for it!  

At that point, set yourself some clear rules to define the parameters of any acquisitions. The following combine some of my rules with those of Brad Sugars. Brad has undertaken countless acquisitions and has, over time, developed a set of rules that he treats as iron-clad and absolute.  

1. Ensure that you have abundant clarity about how any acquisition will advance your overall company strategy. That is to say, what will that acquisition bring beyond just more size.  
2. Find a business that is surviving despite itself. Target a business with bad service or poor presentation that still seems to be making money. Sometimes it is the only supplier in town (better for you). Sometimes, just a few changes can greatly improve it. 
3. Focus on cashflow, not assets. Focus on cash flow instead of tying up your dollars in depreciating assets. This can include consideration of what impact the acquisition will have on the cashflow in the combined business. What synergies will this business bring to your existing business. Beware though…although you should consider such synergies and always be looking for them you shouldn’t pay for them – that is value you’re creating, not that the vendor is creating!
4. Find a business that requires low skills and offers a staple product or service. Unless you are purchasing a business for a very specific core asset, skill set or other rare capability in order to improve your combined business, it is much safer to target businesses that employ people who are easy to hire, easy to train, won’t cost a lot and are easy to keep. If you’re buying a stand-alone business (ie. you don’t already own a business), then it is far safer to buy a business that sells something you know people need. Leave yourself only to focus on improving how the business operates, rather than having to work out whether it even sells something people want or need.  

5. Find a business that you can improve. For example, poor marketing is a sign of great opportunity. This could include no real measuring of results, or having a list of past customers that has never been used as a marketing tool. Typically, a few fixes can greatly leverage efforts.

6. Hire a great jockey. If you’re buying a stand alone business, hiring a great person first to run your business is a great way to go. Say you meet a fantastic chef or barkeeper, then you could buy a restaurant or bar. If you met a great hairdresser, you could buy a salon. The key is to find a great jockey first and then find a great horse for them to ride. If you’re adding a business to your existing business, ensure it has appropriate management from day 1. Avoid the risk that your existing management get distracted and allow your existing business to decline.  

7. Find a business with high upside. If you can’t get a lot of upside improvement, including from synergies with your existing business, you can’t make a lot of money. Focus on companies that are nowhere near running at full capacity or that will add considerably to your existing business.  

8. Be patient for a great deal. Always set your price before you walk into any deal-making session. In fact, walk out of your own door with a firm price in mind. And whatever happens, never, ever pay more than that price. In my experience, most of the great acquisitions make money at the point of purchase. That’s right, not the point of sale. It is so often possible to acquire companies at reduced rates, financed by someone else (including the vendor or suppliers) and requiring incredibly little, if any, of your own capital. Have the discipline to negotiate well and to walk away if the deal isn’t right.

Finally, a point on what happens once you complete the purchase. Plenty of the failed acquisitions I’ve seen weren’t a bad idea in the first place. The acquisition was a sound idea that could have brought considerable value to the purchaser. Unfortunately the integration of the two businesses was handled poorly. In fact, it is often almost ignored! Do not underestimate the differences between any two businesses; differences in processes, customers, cultures, products and services. Identify those differences, plan carefully how you will integrate them and have clear single point accountability for completing the integration successfully and in an agreed timeframe. Sometimes that may be slower than other times but it should always be planned and clear.

In the end, the world is full of acquisition failures and acquisition successes. There is enough evidence that buying other businesses can bring great value. Thankfully, the failures are, more often than not, entirely avoidable. Follow the guidance above to avoid them and enjoy the way good acquisitions can improve, develop and multiply your business.