10 Errors Buyers Make When Acquiring a Business
In excess of fifty per cent of business acquisitions either fail completely or do not deliver the results expected by the purchaser. The main reasons why these acquisitions fail to deliver the desired results can readily be summarised under the following headings:
Not understanding the value of the business
It is very common for purchasers to enter negotiations to purchase a business without understanding the value of the business. Many acquirers do not know how value is determined in the particular industry into which they are buying.
Understanding the valuation methodology that applies in the industry into which a purchaser is buying is vital in ensuring that one is not overpaying.
Not undertaking due diligence
Accepting the financial, legal and technical information provided by a vendor in a sale transaction without having your lawyer and accountant undertake financial and legal due diligence and just relying upon vendor warranties of accuracy invariably leads to purchasers paying too much for a business.
Not understanding the customer/client base
The customers and clients of a business are its lifeblood and failing to understand the plans, needs, stage of business life and financial relationship that each significant customer has with the business can lead to loss of those customers either through competitive product offerings, inability to supply the customers needs, retirement of the customer or insolvency of the customer.
Not knowing why the vendor is really selling
Many vendors seek to dispose of their businesses because they envisage a change in the business or industry which they consider likely to have an adverse impact on the business so they attempt to dispose of the business before that change is implemented. It is critical that a purchaser researches thoroughly the industry in which the acquisition is to be made to understand any industry, legislative or company changes which will impact the financial viability of the business in the future.
Assuming the cash flow will cover principal and interest repayments.
Many purchasers assume that the business will perform entirely in line with the forecasts of the vendor and therefore do not adequately provide for the full extent of working capital required to operate the business and find themselves and the business performing well below expectations. Purchasers who fail to carefully review forecasts and undertake sensitivity analyses invariably leave themselves short of the necessary funding to operate the business and meet their debt commitments.
Paying for potential
Many “smart” vendors will attempt to sell the business based on its potential. If the vendor has not developed that potential it is distinctly possible that the “potential” either does not exist or is difficult to achieve. Purchasers should avoid paying for the “potential” of the business as it will, in most cases, be their hard work which achieves that “potential”.
Acquiring in an inappropriate entity
Often we see purchasers acquire a business or an asset in an entity that is totally unsuited to the nature of the asset or business being acquired. Purchasers should ensure that they obtain sound financial and legal advice as to the appropriate structure(s) in which to hold and operate the business.
Making too many changes too quickly
When reviewing a potential acquisition many purchasers identify changes that will add to the profitability of the business – the key is to make those changes judiciously rather than in haste.
Many potential purchasers are so keen to acquire a business that they ignore the advice of experienced advisors resulting in a far from satisfactory acquisition. Seek advice and use it to either gain a better deal or avoid a costly failure.
Maintaining the brand
Purchasers often acquire businesses because those businesses have built a successful position around a brand but then fail to continue promoting and marketing the brand in an effort to save costs. Such a move can prove to be the death of the brand and the business.