As a business owner, you know the importance of growth. You may already be growing organically through increased awareness, by building a steady stream of loyal customers, or by slowly extending your reach to neighboring communities. But you know it can take a long time—and a lot of effort—to see results. Another strategy can help you grow faster and attain a competitive edge. Buy a business that’s already doing—and succeeding at—what you want to do.
Growth isn’t the only advantage of buying a business. This move can also help you achieve some cost savings by sharing overhead expenses. And sometimes, it can help you gain new capabilities or expand your current business’s capacity.
Before you decide whether buying a second business is the right path for you, take time to learn about the benefits and opportunities for gain, as well as the risks, potential pitfalls, and investment that will be required.
Tell me about the advantages.
Buying a business can be a smart move, especially for business owners willing to put in the due diligence required to find and assess opportunities.
Businesses that are established, profitable, and have a steady stream of customers offer many advantages, which can include:
An established structure.
Many pre-owned businesses have a recognizable brand, a proven business concept, an established customer base, a dependable base of vendors and suppliers, trained employees, a complete set of procedures and processes, and a deep understanding of their competitive positioning.
Owners attempting organic growth can spend countless hours and resources developing these parts of their business, but as a business buyer, you can acquire most (or all) of them in a single transaction.
Does your strategy involve adding new product lines, internalizing more of your supply chain, or taking on new kinds of work that require specialized skills, supply, or equipment? Think about buying a business with those attributes in place.
You’ll likely invest some time into revamping processes, eliminating duplicate costs, or synching up systems. However, you can often avoid the lengthy ramp-up time many others spend configuring these options from scratch. Plus, you can benefit from lessons your target business has already learned.
Clarity of costs.
When buying a business, you’ll be able to examine the company’s financials before agreeing to take control of it. You’ll see how profitable, indebted, and costly it is to run because you can review years’ worth of records before the sale.
Business owners who try for organic growth with new product lines or markets don’t have this advantage. They can certainly make projections. However, it’s all too easy to underestimate the capital they need to succeed.
The ability to bypass initial-phase costs.
Organic growth comes at a cost. Between buying new supplies and equipment, developing marketing and web campaigns, and getting the word out about a business’s new offerings, owners can spend a significant amount of money in the first one to three years of their expansion efforts.
As a business buyer, you may bypass many of those costs. This is especially true if the business you choose is well-established, running smoothly, and well-known in its market.
You can see that there are lots of advantages to “buying growth” over building it. But, there are some drawbacks to consider, too.
What are the drawbacks?
The drawbacks are just as important to consider. These may include:
High upfront costs.
Purchase prices can be significant because they account for more than just the assets and equipment a business holds. When you buy a business, you’ll gain rights to the business’s brand, customer base, concept, strategic plans, processes, intellectual property, and capacity for profit. Because of the value of those items, many businesses sell for one to four times their cash flows. Prices, then, can range from thousands to millions of dollars.
You might attain the funds you need through SBA loans, seller financing, or other financing options. However, the process to attain this funding can be lengthy. And, of course, the funding comes at a cost..
Steep learning curve.
By buying a business, you’ll take on an operation that runs on processes, policies, and practices that’ll take time to learn. You might find it difficult to get up to speed quickly and gain the knowledge you need to guide the business effectively just after the transition.
Lots of owners overcome this by arranging for seller support after the purchase and by keeping on managers or employees who can help the business endure through the transition..
Potential for unforeseen problems.
Before you buy a business, you’ll take part in a due diligence process that should help you spot the business’s problem areas and risks. Still, it’s possible to find additional problems after taking ownership, and those problems could be costly to solve or quite difficult to navigate. For some, these problems include:
How should I proceed?
You’ll need to decide whether the benefits of business acquisition are worth the potential risks. There are steps you can take to lessen the risks:
- Hire a team of qualified professionals to guide you through the process (which should include an accountant and an attorney).
- Learn how to conduct the due diligence you need to gain confidence in a business’s viability.
- Follow a roadmap that’ll help you understand the requirements of acquisition and what you can do to maximize your odds of success.
Interested in a step-by-step guide that will help you through the acquisition process? Log into your free owner’s portal to get started.