Guide To Buying a Business

Small company owners

Small company owners may be individuals, but the risk involved in buying a business is smaller for them. As a successful business owner, the chances that you can make an acquisition work are much better than the odds that someone who does not have a business faces. Some of the advantages that you enjoy include:

• A functioning organization: You do not need to learn how to do payroll, billing, or any of the other myriad tasks that are new to a business buyer that does not already have a business. Yes, there's a learning curve, but it's far less steep.
• Potential synergies: A new business may bring in capabilities that you can use to improve your existing business and your existing business may have capabilities that the acquired business can benefit from.
• Economies of Scale: By increasing your business volumes you can take advantage of the fact that many costs do not go up linearly with sales volume. The cost of preparing payroll for 50 employees is not double the cost of preparing payroll for 25 employees. You may be able to get better prices on supplies, raw material, and inventory by buying in larger quantities.
• Ability to cross-sell: If the business you are acquiring has related products you may be able to sell the new products to your existing customers and to sell your existing products to the customers from the acquired company.
• Better Financing Options: With an existing business you will be able to offer more collateral and get a better deal on a loan than an individual. You may also inspire more confidence in the owner of the business that you are acquiring than other buyers, allowing you to structure the deal so that it includes contingent payments (earn outs), owner note financing (taking back paper), consulting agreements, and other forms of deferred payment to the seller.
• Less Information Asymmetry: As an active player in an industry you will understand that industry far better than outsiders. One of the risks in buying a business — Information asymmetry (the owner of the business knows more about it than any purchaser can) — is reduced.

The Risks Involved In Purchasing A Business

Even though there are good reasons to buy a company and you have advantages (as described above) over an outsider there are very good reasons you might not want to pursue an acquisition. Many of these reasons are discussed in detail later but we'll outline the major reasons here.

Time and Effort

A business acquisition takes a lot of time and effort that you could devote to growing your existing business. There is no guarantee that you will find an appropriate acquisition target, that the company you want to acquire will be available at a reasonable price, that your offer will be accepted, or that the transaction will close. Business owners are busy running their businesses and may be better off avoiding the distraction of an acquisition.

Financial Risk

Buying another business involves a major financial commitment. The money spent on another business increases your exposure to your particular industry and possibly to the economy of your area. You may be better off using that money to diversify your investments.

Integration Risk

Integrating two businesses can be derailed by culture clashes or personality issues. Post acquisition you may lose key employees or important customers. Integrating the companies can take time and attention that would be better spent growing the business in other ways.

Information Asymmetry

No matter how well you know the industry the person from whom you are acquiring a business will know his own company better than you do. Perhaps he suspects that a key customer is having some financial difficulties, a fact that the customer may not have disclosed and a fact that the customer certainly won't disclose to you. Perhaps one of his key employees is going through a difficult time and has become less reliable. You can research a company only so long, so buying a company involves some risk because of the information asymmetry that will inevitably exist.

Corporate Buyers

If you are a corporate buyer, a manager of a company that you don't own acquiring a company involves less risk than would be involved if you were pledging your own money. Nonetheless, your career and perhaps even your employment can be at risk if you make an ill advised acquisition. On the other hand, if your job is to make acquisitions there are rewards for making good deals and repercussions for not being able to find attractive deals on your employer's behalf. Much of the information here is designed to help you make only good acquisitions.

Professional Buyers

If you are a professional buyer, a Venture Capitalist or a Private Equity Group then there is not a lot of new information here for you. This manual is designed for those who have far less experience with the buy/sell process.

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