Many entrepreneurs aspire to build their own business from the ground up, creating a unique product or service which taps into consumer demand or addresses a gap in the market. However, starting from scratch isn’t the only option, for some, purchasing and transforming an existing business can also prove successful.
For individuals treading this path, steps must be taken to ensure that a viable business is selected for takeover, a well-considered strategy is devised and that these plans are effectively implemented from the offset. While any money-making opportunity carries a degree of risk, these risks can be significantly reduced by accurate forecasting, contingency planning and analysis.
Identify a viable business
When scouring the market for firms that may be suitable for purchase, a good place to start is the company profit and loss account (P&L). Look out for a healthy and consistent revenue stream as well as evidence that the business is profitable; further efficiencies and plans for growth can be implemented post-takeover to create additional value and return on investment.
Analyse the asking price to determine whether the perceived worth of the business is justified. Investigation of the firm’s revenues, assets, customer base and brand will soon expose an unrealistic valuation and a frank conversation with the current owner will establish the potential for negotiation. If the owner is not willing to compromise on price, then the interested parties should take a step back to avoid any further time investment.
Crucially, making a decision regarding the final purchase should not be rushed. While it is only human to get excited at the prospect of starting a new venture, exercise caution and be sure to closely analyse company records for any ‘one off’ revenues or recent cost increases not yet fully seen in the P&L. Potential buyers may also find it useful to consult trusted members of their business network for a second opinion, this objectivity can identify otherwise overlooked issues and offer a fresh perspective.
Formulate a comprehensive business plan
Once definite interest in a company has been established, an in-depth strategic plan should now be formulated. The key here is to avoid overconfidence, if a particular part of the business is currently struggling identify why this is, where specific improvements can be made and if you possess the required knowledge, skill and determination to implement changes.
For example, an ecommerce business’ stagnating customer base may be attributed to an insufficient or inefficient marketing strategy, identify what additional tactics can be employed to engage customers and what return can be realistically forecast as a result of increased investment in this area. Alternatively, analysis of outgoings may reveal that certain costs are higher than they should be and previous industry experience may allow you to identify realistic and achievable cost savings. Consider how these savings will be implemented, how long it might take and calculate the potential impact on profitability. Identifying immediate improvements that can be made such as delivery costs or payment terms with suppliers will ensure that the new owner can improve the bottom line, and cash flow, relatively promptly.
Be prepared to hit the ground running
Acquisitions can take a significant period of time to complete and it is always advisable to hire an experienced and competent lawyer to oversee the contract. However, once the deal is complete activity will begin with a bang, so again, preparation is key.
Unlike starting a new business, where the pace is very much dictated by the founder, the owner of an existing business will need to get up to speed from day one, dealing with outstanding orders and ongoing activity to maintain the operational standards of the business.
Gaining an in-depth understanding of sales and delivery protocols is essential if customer service levels are to be maintained. If possible, negotiate a training or transition period with predecessors; in many small businesses processes are not always written down, observing them first hand will reduce the risk of mistakes being made and promote best practice, which the new owner can implement from the offset.
Again, the onus in these first few weeks must be on mastering the basics and ensuring the smooth running of the business alongside such a steep learning curve. Once this has been mastered, the owner is now in a much stronger position to implement the strategic changes outlined in the business plan and in fact, may have identified additional priorities now armed with a deeper understanding of business practices.
For ambitious and business-savvy entrepreneurs, acquiring an existing business can present excellent opportunities for success and business growth. As with any large decision, care must be taken to analyse the suitability of the venture and identify realistic avenues for increased profitability and efficiency. If due diligence is adhered to and the correct preparations made, the right purchase could prove extremely fruitful.
Nick Acaster is the owner of Rugs Direct, an e-commerce business he purchased from its founder in April 2014. Since taking over, Nick has increased revenues at the firm by 50 per cent.
Further reading: Stop your golden business idea running away from you