By Vishal Bharucha, president of VNB Business Brokers, a leading business brokerage and M&A advisory firm.
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These days, entrepreneurs are opting to buy existing businesses rather than building their own from the ground up. Acquiring an established brand is like operating a well-oiled machine—an easier endeavor to leverage growth compared to starting from scratch. However, while the risks are significantly lower, several factors still come into play in determining the success or failure of your business—and buyers should always remain cognizant of these factors before purchase.
In an interview with the U.S. Chamber of Commerce, Tim Conn—co-founder and president of Image One Facility Solutions—notes that half of all businesses are bound to fail in their first five years. In a study conducted by the Bureau of Labor Statistics, approximately 45% of businesses decline within this time bracket. This is a reality check for all buyers as those formative years are crucial: Every step needs to be calculated with precision, and every decision made needs to be well informed.
Let’s look at five keys to success that every buyer needs to know prior to purchasing a business.
Finding The Right Industry
The first step is to find the industry that is aligned with your goals and interests. Your niche and experience matter as they determine your ability to efficiently and effectively operate a business. It’s not ideal to spend the majority of your time learning about the industry; that’s why having some level of insight, experience and understanding is important. With sufficient knowledge and relevant skills, you’ll be able to make sound decisions about your business operations.
Due Diligence
The decision-making process of buying a business is not a one-person job. You’ll need a team of experts to verify the information and guide you through the process you might be unfamiliar with. Sourcing assistance from certified public accountants and lawyers to ensure all legal documents and tax reports are up to standard is a requirement, not just a recommendation. You will also need a financial expert to analyze and validate the business’s financial report so you can assess the feasibility and growth potential of the business you’re interested in buying.
There is a repository of documentation that your business broker should present to you. These include marketing documents covering the pertinent aspects of the business with the aim of providing you with an overview of what’s on offer. As the sale transaction moves through its various stages, bank statements, vendor contracts, tax returns and lease agreements should be made available to you as the buyer.
The Art Of Making An Offer
Learning the art of making an offer can severely impact the success of a business sale. The key to an effective offer is proper negotiations, which are heavily reliant on compromise. Try to make room for concessions that don’t matter to you but mean a lot to the seller. This can not only help build long-lasting relationships but also help you avoid future conflict. Your business broker should be experienced in negotiating and help guide you through these steps.
Keep in mind that the goal is to arrive at a mutual agreement, hence both parties should be equally satisfied. The key is to be flexible with your terms and be open to suggestions. Assert your conditions, but be ready to compromise if necessary.
Be Realistic
While ambition is a vital aspect of acquiring a business, it’s also equally important to be realistic. Carefully consider what you can afford. This way, you’ll be able to assess whether you have sufficient capital for investment or whether you require financing from an outside lender. This will determine the price you can offer and if it’s feasible to satisfy the seller’s asking price.
Once you’ve bought the business, the next step is to set your expectations for its profitability. Your cash flow forecast should be supported by realistic assumptions on future trading, market changes and consumer behavior.
Retain Key Employees
Naturally, a potential buyer would find an existing business’s smooth operations and sound cash flow report as the most attractive factors to consider. However, it is important to know that the reason for this existing success is oftentimes due to the contributions of its key employees.
Not only can this make the transition smoother, but it could also retain existing customer or client relationships and keep the goodwill built over time in the business. Retaining key employees can help the new owner understand the business in an expedited manner due to their institutional knowledge.
Buying a business is a big decision. This is especially true in a post-pandemic world. As a buyer, you should have a level of understanding of the industry you intend to operate in, conduct proper business scrutiny, undertake efficient negotiations and set realistic expectations. While this can feel overwhelming, your business advisor or broker should be equipped to guide you through the process.