Why might an entrepreneur wish to purchase an existing business rather than starting one from scratch?

Here are six questions to ask to make sure a potential acquisition target is right for you.

1. Why do customers value the business?

A business with an established customer base may be more expensive to buy, but this isn’t necessarily a bad thing. You’re inheriting the company’s "goodwill", which can come with better access to immediate cash flow and existing customer relationships you can build on.

But to make sure a business is worth your time, you’ll want to find out why people buy from them.

• Is it great products or top-notch service?
• Exerienced and professional employees
• Is it the customers’ relationship with the owner?
• Will a change of ownership change that?

Market research can help give you some insight into how clients view the company`s products, services and overall brand.

Think carefully before you acquire a business with a damaged reputation, as this can be hard to turn around. Ask why the company is up for sale and ask about its—and it’s owner’s—reputation.

See what people are saying about the company online. It may not be representative of the full picture, but it will give you a good glimpse into how the business is perceived and what needs to be done to change those negative feelings.

2. Is the product or service unique in the market?

If you’re targeting a business in an industry that has lots of competition, probe further to find out what the company does to differentiate itself, as this is a key reason why clients will keep coming back (see above).

If there is no obvious differentiator, think about what you would need to do to help set yourself apart as well as the effort and cost involved in doing so.

3. What’s the company culture like?

Carefully observe the company’s culture, management style and the quality of the work it does, as well as the seller’s relationships with employees and managers. See if they align with your personal philosophy and whether it’s worth making any changes. Remember that rapid change following an acquisition can be met with resistance from employees, vendors and partners.

Long-standing employees are also a big plus. They know the company, the products and the processes. And they can offer insights into the business and the industry. If turnover is high, ask yourself what is the cause. Is it competition within the industry? The company culture? An aging workforce? These questions will give you insight into any human resources issues or needs.

4. Do you know enough about the business or industry?

Don't fall into the trap of buying a business in an unfamiliar field because it seems like a sure thing.

It's much more difficult to succeed in an industry in which you have no experience or little interest. Evaluate your skills, interests and experience, and make sure the business matches those attributes. Choosing familiar territory greatly reduces the risk of failure

5. Will this new business “fit” with any existing businesses you have?

If you are growing your business through acquisition, you will need to look for synergy in key areas.

• Products or services should be related or complementary to what your existing business already sells.
• Marketing and sales methods need to mesh well with one another.
• Production and delivery methods will need to be harmonized.
• Staff from the new firm will have to be integrated in your business, and you will need to have a plan to deal with potential redundancies.

It can be a good idea to start thinking about the integration plan during the due diligence process. In this way your evaluation of the company will go beyond pure accounting to also take account of your strategic goals.

6. Are there hidden costs you are missing?

Hidden problems can make the business less attractive than it initially appears. If leases for facilities or equipment are about to expire, for example, you could be facing unanticipated costs. A proper due diligence will allow you to uncover these issues and avoid costly oversights that can leave you burdened with unnecessary debt.

Once you've begun your due diligence, don't limit yourself to examining operations and financial statements. You also need to talk to employees and suppliers to evaluate the business's true worth.

Finding and researching a business to acquire can be a time-consuming and costly exercise. But, well done, it can be well worth the investment

Hello there! Pardon me for the irregular postings on this blog once again, caused by certain unavoidable circumstances, and please never get tired of my apologies. Let’s remain pals and partners in developing terrific enterprises and promoting entrepreneurship globally. Ok? The entrepreneurship agenda is just too big and important to treat lightly. I hope you agree with me, don’t you? We are talking about meeting human needs and serving society. We are talking about creating and delivering value to close gaps in people’s wants, needs and desires. It is a responsibility and a commitment. That is the core thing – but profit comes along the way.

Today I would like to write about buying an already existing, operational or running business. Now, buying a business could be the preferred way to kick-start an entrepreneurial journey for some folks, but it could also be used as a means to expansion and growth for some. Whatever the objective you have for buying a business! That’s purely up to you. However, I would like to focus on the advantages that an entrepreneur gets by buying a business rather than starting one from scratch. I know that some guys enjoy the kick and adrenaline that accompanies a start-up, yet I know that others desire an easier way to get things moving.

So, what are the top 7 reasons for buying a business instead of starting from zero?

1. Market dimension. First, don’t worry about my use of the word dimension. The point is this; I intend to categorise my points into the key issues rather than having a long and boring list. Ok? This is why I have just seven points for you. There are several aspects of the market where you already have an advantage when you buy an established business. The business already has an established and known business name, brand and market position, reputation, goodwill etc. The enterprise’s market position in respect of customer base, market share and resources is guaranteed and customer access is instant. The business idea has already been tested in the market, and the concept established. All these provide a good spring board my dear entrepreneur, and your work in the market will be principally to sustain and expand it. Isn’t this great? However, let me warn you. Don’t get a good thing and mess it up! Agreed?

1. Financial dimension. There are also huge advantages in the financial dimension, which are good reasons to buy an existing business. The business has an existing and predictable cash flow so you have money from day one. Is this not simply fantabulous? You have invested big money buying the business, hence starting to see money flowing in is pretty nice I think. Money speaks the language that everybody understands. It is also easier for you to secure finances to buy such a business if you are short of cash. Even if you went to the bank, the bank manager would not look at you like you have just landed from another planet where money is extremely scarce – more than the scarcity on earth. You also have the advantage of ease of arranging debt for that business for future needs, moreover with low interest rate because the business is known and tested. These also imply that there is less financial risk as long as the enterprise was doing reasonably well. Again, the steady income in the business can be reinvested to generate more value. I don’t know what else you need Mr. Entrepreneur. Tell me!  

1. Knowledge dimension. I have written an article about the importance of knowledge to an entrepreneur. It’s entitled the Top 8 reasons why knowledge is vital for an entrepreneur. I strongly recommend that you read that article too. When you buy an existing business, you can arrange a mentoring opportunity with the previous owner to handhold you for a short time as you level up, assuming that he or she is co-operative anyway. There are some difficult folks out there and you can’t take things for granted. Do you get me? Additionally, the business has human capital in place, which is trained and knowledgeable about the business. Industry knowledge is available within the enterprise. The business and marketing plans are in place unless otherwise. The common challenges that exist in the business have already been considered, discussed and possibly largely addressed. Pricing mechanisms, business terms, contracts etc. are all in place. Unless you are simply extremely lazy and unserious, there is a solid knowledge base for you to succeed. Isn’t it?

1. Focus and effort dimension. Another top reason for buying an existing business instead of starting from scratch is the aspect of where you place your energy, effort and focus. In this case, all the fallacies of start-ups are largely gone. The extreme effort including energy and passion that is required for start-ups is not mandatory. Enough groundwork has been done already. This means that your effort as an entrepreneur turns to growth and development. You focus on value addition. You focus on fine-tuning the business and up-scaling it if the right parameters are in place and business fundamentals are good, not just for the sake of it. I put a qualification of right parameters and business fundamentals here because some entrepreneurs simply desire growth, whether that growth adds value or is destructive. Not every growth is profitable and worth the effort, and I think I have explained this in one of my previous blogs. That blog is actually entitled 9 Principal Reasons Why Revenue Growth In An Enterprise May Be Useless. Be smart my dear entrepreneur! Focus on what matters, and do it right and for the right reasons. Do you understand?  

1. Networking and partnership dimension. Again, networking is very important in business. The interesting thing I sometimes discover is that many people who yap about networking don’t actually network enough! It’s a sweet and easy word to use but putting it into practice is something else. An existing business has established network of suppliers and supply chains, financiers, consultants, marketing companies, customers, distributing channels etc. There are existing partnerships that you can take advantage of when you buy such a business. You can leverage on these to even propel your business higher. This is another very strong reason why buying a business may be a preferred option to starting from zero. I know people often refer to zero based budgeting, zero based planning, zero based blah blah blah! Good but sometimes you might consider starting from some number greater than zero.  

1. Systems, procedures and processes dimension. What about systems, procedures and processes etc.? Already existing enterprises have established systems and subsystems, procedures, processes, controls including checks and balances etc. For example, an existing sales system with subsystems such as delivery, after sales service, inventory management, promos, incentives etc., is a big plus. A finance and control system with subsystems such as financial reporting, accounts receivables, accounts payables, treasury, risk management etc. is another big plus. There are of course cases where you buy a business from a very lazy entrepreneur with an equally sleeping team that could not have put in place suitable and robust systems for the business. Where all is in place, and their efficiencies and effectiveness measured and tested, this gives a good foundation as you will not go through the stress of these nitty-gritties. Candidly, isn’t this another strong point? Come on!  

1. Plant and equipment dimensions. I will conclude by writing something about resources such as plant and equipment. I know that not all businesses require or have huge investments in plant, equipment and other infrastructure. However, where these are vital to business operations and success, buying an already existing business gives you access to all these at a go. Moreover, they could be well set, fitted, operational with people to man them etc. If you have ever been involved in setting up or managing a business where these items are critical to business operations then you might have a good idea of what I mean. Challenges that entrepreneurs usually face in financing, procuring, installing, getting the right manpower to operate machinery and equipment etc. can be daunting. So, if you buy a business with all these done and in tip-top condition, you can have some spare time to go to the beach! I mean it.   

Ok. I think we have had another comprehensive one today. These are strong points that you cannot ignore when considering your options in either starting from scratch or buying an already existing or operational business. The choice is yours but we wise!

Have a fantabulous new week,

The Wise Entrepreneur

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