When you own a business, the simple act of acquiring another small business is often one of the smartest investments you can make. Not only does it provide an opportunity for an additional stream of revenue, but it can also yield advantages in areas like taxes, accounting, and resource maximization.
But business acquisitions are rarely easy or straightforward. Things can get messy, and it’s important to do your research.
4 Considerations When Acquiring Another Business
A smart business acquisition can do a number of things for your business. It can create economies of scale and expose your core business to a new audience. It can also enhance the level of talent in your organization and improve profitability through access to additional resources.
However, in order to enjoy benefits like these, you have to be selective in which businesses you invest in. As you look for good matches, consider the following:
1. Alignment with Your Core Values
“I like to think about my company and our acquisitions as many chapters in a detailed overarching narrative,” entrepreneur Rob Fulton writes. “Does it make sense to the customer and do our products and acquisitions flow from one chapter to the next? I hate it when other companies pick up acquisitions that seem to come out of left field. It makes me feel like they’re playing a game of Monopoly rather than running a business.”
Before starting the search process for businesses, make sure you have a detailed understanding of your company’s core values. This is the lens through which you’ll evaluate other companies. If their core values aren’t in alignment with your own, it’s not a good fit.
2. Consistency with Your Branding Message
In addition to core values, think through branding. While the brand of the acquired company may or may not be directly involved with the existing brand in a customer-facing context, consistency in messaging is still important.
For example, let’s say you own a large childcare center and are looking to acquire a food and beverage business that will allow you to have more control over the food that’s served in your cafeteria. Even if it has an extensive food portion, purchasing a company that’s heavily involved with beer and liquor sales doesn’t jive well with your brand messaging. Despite the fact that there will be no direct interaction between the childcare center and the beer and liquor portion of the acquired business, it’s not a good look.
If the core values and brand messaging mesh well together, you can dig into the meat of the issue: the financials.
Business valuations vary by industry, type of business, age of the business, and what’s being sold. (In regard to that last point, you need to know if you’re buying the business entity, the assets, or both. Never automatically assume you’re getting both.)
Browse online listings to develop some familiarity with what’s on the market and what sorts of relationships exist between revenue and asking prices. As you can see with these businesses for sale by PMABB, asking prices range from 1.5 to four times the annual revenues. This is typically a good ballpark range, though some larger multimillion-dollar businesses will sell at significantly higher multiples.
4. Existing Debt, Assets, and Liabilities
Revenue is one thing, but it rarely paints the complete picture of a company’s financial health. In addition to studying revenue trends over the past three to five years, you’ll also want to ask for detailed information on existing debt, assets, and liabilities. This will allow you to see where things stand.
The Consequences of Not Performing Due Diligence
“If you don’t do your due diligence, you might make a purchasing mistake,” writes Mike Kappel, CEO of Patriot Software. “The person you are buying from might try to leave out details or fudge numbers to hook you. Without verifying the details you receive and searching for more information, you might buy a business or product that isn’t a good financial investment.”
These risks aren’t meant to scare you, but you do need to be aware of the fact that there are commonly hidden pitfalls in the purchase and acquisition of private businesses. The sooner you’re aware of this, the better your chances will be of avoiding duds and finding profitable opportunities.