Buying a business is like buying a houseWould you buy the first house you see without looking at it? What about buying a business? |
Imagine the scenario. You bought your current house a few years ago. Since then, the family has expanded and you’re thinking about trading up to a bigger place. But, so far, it’s just been a thought. However, driving down the road you spot a ‘for sale’ sign for a house that, on the face of it, looks great. It’s not quite in the area you’d prefer but it’s close enough. You go to the open home and confirm it’s got the space you’re looking for. Whilst you notice a few areas that need tidied up, it’s nothing major and the price should reflect the work that needs done. After all, it’s had a fresh coat of paint.
“Fantastic!” you think – you put in an offer and, after a bit of negotiation where you have to increase your price, the offer is accepted. All too easy – who says that buying a house is stressful and difficult?
Well, think about the next stage – telling your spouse. You haven’t wanted to bother them through the process – they’ve had lots going on and been a little stressed; they’ll appreciate not having to do anything except sign the documents and help with the move, right?
The words of a well-known beer advert spring to mind.
Funnily enough, your spouse is quite keen to view the property before putting any signatures on any documents. During the visit, they make a few points:
- the house is outside the children’s school zone – slight issue
- those “few areas that need tidied up” include wiring issues – best to get a certified electrician to have a better look at that
- they think that fresh coat of paint is hiding damp problems
- the neighbours have large and unruly dogs – and you have young children
- you’ve conditionally agreed to pay HOW much for it and move by WHEN?
The purchase, if it continues, is certainly not going to be on the current terms.
In this scenario “deal fever” had taken over and your decision to purchase was made by your heart, not your head.
But that’s a personal purchase – you wouldn’t find that happening in business, would you? In short, yes. Emotional attachment to your business is often greater than you think so when making a business acquisition “deal fever” can, and does, take place.
For this reason there are a therefore a few simple rules to remember:
- Have an acquisition strategy that’s been discussed and agreed with relevant stakeholders (other shareholders, bankers, even key customers or suppliers). Consider why you’re acquiring, what criteria you want in an acquisition and what your timescale is. That way, you won’t buy “outside the school zone”.
- Do due diligence on the businesses you approach. Don’t buy the first one that comes to your attention – think about business, industry, regulatory and execution risks. This is when you find those hidden wiring and damp problems. Your financial, legal and other advisers are well trained and ideally placed to help you with this. They also bring a well recommended element of independence.
- Consider the culture of the business, not just its operations or assets. Do you really want to mix unruly animals with children? No matter how good the target looks on paper, businesses rely on people and if the two organisations have management and staff with different attitudes, it’s likely that integration will take longer and cost more. That’s if it happens at all.
- Ensure you’ve got enough resources for the transaction. That includes management and adviser resource to execute the transaction (they generally take longer and have more issues that initially considered) and financial resource to purchase the business (don’t put your core business at risk by under-capitalising the acquisition). Don’t go it alone.
- Be prepared to walk away. If there are too many problems or the price is too high, don’t get caught up in deal fever and end up paying too much too quickly. And be cautious when projecting the level of cost synergies you think you might achieve. More often that not they’ll be less than anticipated and shareholder value could be destroyed.
- Think about what needs to happen post-acquisition. Do you need to move premises and relocate employees? Do systems need to be combined? Will key customers and suppliers be happy with your acquisition? The hard work starts once the legal documents are signed.
After all, Proper Planning Prevents Particularly Poor Performance.
Source: Unlimited Growth Newsletter