A businessperson thinks carefully about his strategy to grow through acquisition.

What to Consider Before Buying an Established Business

As a business owner, you know the importance of growth. Efforts to grow organically through increased awareness, by building a steady stream of loyal customers, or by slowing extending your reach to neighboring communities are essential. But it can take a long time to see results. Another strategy can help you grow faster: buying a business that’s already doing—and succeeding—at what you want to do. We call this strategy “grow through acquisition.”

Growth isn’t the only advantage of buying a business. This move can help you realize cost savings by sharing overhead expenses. It can also help you attain new capabilities or expand your current business’s capacity.

Ready to decide if buying a second business is the right path for you? Take some time to learn about the benefits, opportunities for gain, risks, potential pitfalls, and the investment you'll need to make.

 

Tell me about the advantages.

Buying a business can be a smart move for many business owners, especially those who put in the due diligence required to find and assess opportunities.

But not every business is a great opportunity. It's businesses that are established, profitable, and have a steady stream of customers that offer the most advantages. Here are a few:

Gold bars

An established structure.

The best pre-owned businesses have a proven business concept. They also have a recognizable brand, 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.

 

When you try for organic growth, you can spend a significant amount of time and resources developing these parts of your business. But when you grow through acquisition, you can acquire most (or all) of them in a single transaction.

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Fast Forward

Faster ramp-up.

If part of your business strategy is to add new product lines, internalize more of your supply chain, or take on new kinds of work that require specialized skills, supply, or equipment, you may be able to buy a business that already has those pieces in place.

 

You'll likely invest time into revamping processes, eliminating duplicate costs, or synching up systems. Still, you’ll probably avoid the lengthy ramp-up time many spend configuring these options from scratch. Plus, you’ll benefit from the trial-and-error lessons your target business has already learned.

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Bar chart

Clarity of costs.

When you grow through acquisition, you’ll be able to examine the company’s financials before agreeing to take control of it. You’ll see how profitable, indebted, or costly it is to run because you can examine years’ worth of records before the sale.

 

When you try for organic growth with new product lines or markets, you don’t always have this advantage. You may make projections, but it's easy to underestimate the capital you need to help your business thrive in new contexts.

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Piggy Bank

The ability to bypass some 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 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 could bypass many of those costs. This is often the case when the business you choose is well-established, running smoothly, and well-known in its market.

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Many of these points highlight the advantages of buying growth over building growth. Of course, there are some drawbacks to consider, too.

 

What are the drawbacks?

The advantages are great, but some parts of buying a business can seem less favorable. For many business owners, these can include:

Money

High upfront costs.

Purchase prices can be significant because they account for more than just the assets and equipment a business holds. As a buyer, 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 elements, many businesses sell for one to four times their cash flows with prices that can range from thousands to millions of dollars.

 

You may be able to acquire the funds you need to purchase a business through SBA loans, seller financing, or other financing options, but the process to attain funding can be lengthy, and the funding comes at a cost.

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Books

Steep learning curve.

By buying a business, you’ll take over an operation that runs on processes, policies, and practices. All of these will 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 out of the gate.

 

There is a workaround. Many arrange for seller support after the purchase of their business, either by hiring them as a consultant or employing them for a short period of time. You might also be able to retain some managers or employees who can keep the business running smoothly through its transition.

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Iceberg

Potential for unforeseen problems.

Before you grow through acquisition, you’ll take part in a rigorous due diligence process that should help you spot the business’s problem areas and risks. However, there is a possibility that you’ll uncover additional problems once you take ownership, and those problems could be costly to solve or quite difficult to navigate.

 

Those problems may include:

  •  The chance that many of the business’s sales were made with customers who had close ties to the previous owner. Continuation of those sales may not occur when the owner exits the business.
  • The possibility that key employees will exit the business and take the critical knowledge you need to navigate the transition.
  • The risk that competitors will catch wind of the transition and make plays for your customers and employees while you and the seller are distracted with the sale.

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How should I proceed?

You’ll need to decide whether the advantages 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 owner’s portal to get started.

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