Top tips when buying a business
Buying a business can bring significant profits and advantages from various perspectives. To help you make informed decisions, we have put together a list of top tips when buying a business. Neglecting the details can lead to post-acquisition failures, resulting in the loss of all invested material resources, effort, time, and expansion plans.
Despite being a complex and lengthy process, paying attention to a few key points during the transaction can easily help you avoid 90% of business pitfalls. You can also negotiate more strongly on the price to ensure that your investment is worth the money. Here is a list of top tips and what you need to know when buying a business:
#1: Do not rush through due diligence
One of the top mistakes when buying a business is to rush through due diligence or neglect it altogether. Due diligence involves checking the accounting documents and legal situation of the company before signing the final contract. If done hastily, important elements and hidden defects may be missed, which can lead to significant problems down the line.
What you need is a good accountant and a good lawyer that can identify any real problems in the company. It’s essential to offer the necessary time for checking the situation to avoid a huge headache. Those who neglect due diligence are simply inviting failure.
For example, buying a company without proper due diligence could result in discovering several ongoing lawsuits after the purchase. This could lead to paying damages that far exceed the value of the company, in addition to the legal costs. Therefore, it’s crucial to take due diligence seriously and avoid rushing through it.
#2: Check Contracts/Clients
It’s important to assess the company’s ongoing contracts and client relationships before making a purchase. Long-term contracts can provide security, while the lack of signed contracts may indicate a risk. Check the longevity of collaborations and what percentage of the turnover is given by each client. It’s best to avoid relying too heavily on one client – ideally, no client should represent more than 5% – 10% of the turnover.
For example, companies that had exposure to a single industry, such as Horeca, and provided services to clients in that industry, were severely impacted during the COVID crisis. Another scenario to be aware of is when a client represents a significant portion of the company’s turnover, and they are themselves bought and want to use another supplier. It’s important to assess the potential impact of such changes in client relationships.
#3: Check the management/key employees
In most companies, employees are perhaps the most important element: if they are satisfied, well-trained, and loyal, then you are most likely to enjoy good or even excellent performance.
Unfortunately, in Romania, not much emphasis is placed on a hierarchical management structure, and usually, there are one or two people who carry the weight and lead the teams. It is essential to ensure that there are personnel who can take on the role of a manager, as otherwise, you risk having major headaches with recruitment and implementation. Additionally, the training and age of employees are crucial factors.
Example: At a manufacturing company, 50% of the workforce is two years away from retirement. This means that not only new labor force must be recruited, which may not be available in the area, but they also need to be trained, which involves substantial additional costs or may even result in the loss of clients/bankruptcy if the workforce is not available.
#4: Take projections with a pinch of salt
The future looks promising, and for entrepreneurs looking to sell their business, success is just around the corner, and next year is the year their business will hit it big, especially if they receive a little help from the new buyer (just a bit of marketing, and it’s a multi-million-dollar business). The story sounds great, but the reality is a bit harsh, and those who already have a business know that success involves a lot of hard work and many risks taken. This does not mean that a business does not have potential and is not worth investing in, but please do not be misled by a simple table of projections that is not sustainable.
Example: A portfolio for an angel investor has a success rate of 1 in 8. This means that only one of the eight businesses in which they invest will truly succeed, even if all present very positive scenarios.
#5: How to Negotiate Effectively: Understanding the Elements That Matter
When buying a business it all comes down to negotiation, but the price is just one aspect to consider. In fact, we’ve had success in several transactions where our offered price was lower than our competitors’. Why? Because we took the time to understand the seller’s true priorities.
For some sellers, factors like retaining key employees, remaining as consultants after acquisition, or continuing to grow the company may be more important than the sale price. As a buyer, it’s essential to understand these motivations in order to craft an offer that resonates with the seller.
While money may be a factor in many negotiations, it’s not always the primary motivator. Focusing solely on the price can lead to missed opportunities and ultimately, failure. Instead, take the time to understand what the seller truly wants, and you’ll be better equipped to negotiate effectively.
To succeed in negotiations, arm yourself with patience and be prepared to seek out the seller’s true motivations. By focusing on the elements that matter most, you’ll be able to craft offers that stand out from the competition and avoid potential pitfalls.
#6: Why It's Important to Respect Confidentiality in Business Transactions
At the start of any potential acquisition conversation, it’s advisable to sign a confidentiality agreement. While such agreements may be difficult to enforce in court, they help ensure that both parties have agreed to keep sensitive financial information and clients confidential. Failing to do so can result in serious harm to one party and may even sabotage the entire transaction.
For example, I know of a case where employees learned about an upcoming transaction and mistakenly believed they would be laid off. As a result, many of the company’s most competent individuals accepted job offers elsewhere, causing significant harm to the company. Additionally, there are cases where a buyer’s loss of a seller’s trust can lead to the sabotage of an entire transaction.
#7: Why You Need a Good Consultant for Business Acquisition
You may wonder if you really need an intermediary to facilitate negotiations between you and the seller. After all, wouldn’t this just complicate things and cost you money? While this is one option, bringing an inexperienced negotiator to the table could put you at a disadvantage, and they may even ruin the entire deal by touching on sensitive issues.
The solution is simple: choose a good consultant when buying a business. A consultant brings valuable experience to the table and can negotiate on your behalf, saving you time, money, and headaches. They will know how to handle the endless discussions from both parties and explain complex business concepts in understandable terms. With the right consultant, you can rest assured that most problems will be resolved before they even become problems.
Although it may seem like a broker is just a salesperson, they are primarily mediators. When you are negotiating a deal worth hundreds of thousands or even millions of euros, you want to work with someone you can trust. A good consultant will be a valuable asset in this process.
If you’re still on the fence about acquiring a business, keep in mind that the return on investment for a business is usually better than other types of investments. While it may seem daunting at first, with the right guidance, it can be the fastest way to grow and develop your empire.