A startup has time for planning, preparation and analysis. In business acquisitions there are no such luxuries. Once the business is handed over – you dive head first. Instantly you’re in charge. And since the business is already operational – decisions have an instant impact.
About the reviewer:
Alex Silensky, partner at OGS Capital, has over ten years of experience in acquisitions, guiding his clients through due diligence processes and identifying potential red flags.
Finding a business to acquire
Acquisitions are not a shopping trip to the mall. For a sale to go through you need thorough prep work and research. A Stanford University study on acquisitions showed that only 3/4 of acquisition proposals lead to an actual sale. Some businesses engage in acquisition processes only to test out the water with no intention of selling. Due diligence and analysis of quality of earnings reports will help you find a business that’s the best match for you.
Why is a business on sale?
A sale of a business shouldn’t always raise red flags. Motivation behind a sale could be as simple as the owner wanting to retire. For others, it could be how they make money. Selling businesses with an established customer base is a viable business model. This allows an investor to skip to operating a business with an established standing and a loyal customer base. However, some businesses are sold when they are in trouble – loans, bad reputation, verge of bankruptcy, anything really. Identify the motivation for sale of a business you are interested in acquiring.
What kind of business do you want to buy?
Your search criteria will vary depending on your motivation to buy an existing business. Just like with selling, motivation for acquiring an existing business can vary. For example:
- An investor needs a business that has been around for a specific period of time. Sometimes such requirements are set for participation in tenders. This way you would be searching for a business that’s been in the industry for three, five, ten years. In this case poor reputation or other discrepancies may be overlooked.
- Starting a new business is time consuming. At times a startup will require work with no weekends and overtime. Acquiring an established business with a good reputation allows you to skip to the good part.
- Acquiring businesses for cheap, fixing them and reselling them. It’s a business model in which you make profit from reselling the business.
Acquisition entrepreneurship is about taking control in a running business and rebuilding relationships with employees, customers and suppliers. Risks that can be encountered are overpaying the real worth of the business. As well as buying a business that does not have enduring profitability. To minimize acquisition risks, thorough analysis of a businesses reputation, customer base, due diligence and earnings reports.