EVALUATING POSSIBLE ACQUISITIONS
EVALUATING STARTING A NEW BUSINESS
“Caveat Emptor” which is Latin for “Buyer Beware”
How to obtain important information for your evaluation on the purchase of a new business
or company, beyond the traditional approach and avoid falling into “the money trap”
How to uncover the details that will cost you significant money later.
How does the economy affect the number of people looking to buy a business or start new
Why are so many people considering starting new businesses
Why are so many companies looking to purchase other businesses
How to look at a new business opportunity in a little different manner.
How to evaluate the potential of a business opportunity
What strategies can be used to select businesses or companies to purchase
How to approach a possible new business opportunity
How to gather critical information beyond the financial reports to help determine a fair
value for purchasing
How to find a business to purchase
This article will primarily discuss companies seeking to purchase other businesses but will also briefly touch on important information for individuals looking to purchase or start a business.
These two actions are interrelated with many of the same considerations and issues.
Both companies and individuals have been seeking out businesses to buy or start, for many years.
This is not new.
What is new and has changed; is the increased number of companies and individuals looking to purchase or start a new business.
During these economic times of both manufacturing and service jobs in the U.S. moving off shore, there is higher unemployment and fewer job opportunities available.
We now have a significant number of educated and skilled management level people unemployed.
With high unemployment and jobs more difficult to find, many people of all skills, education, and experience are looking at their options to start or purchase their own business to earn an income.
There are all types of businesses for sale or available to become involved in with the promise of doing well.
Business brokers are companies or individuals that make their money on finding businesses to sell and finding buyers for them.
You also hear about business opportunities promising a better life, making all of that big income while at home working less hours and not having to worry about losing your job ever again.
I can assure you that all of this is not as easy as it may have been advertised and there are plenty of pitfalls that you must avoid.
You can easily find these supposedly great new businesses to invest your time and money in;
– In your own mail box
– On the internet
– On all of those pop ups while on the internet
– On the local cable TV channels
– On the local radio channels
– In the local newspapers
– In magazines
– In the Free magazines and newspapers displayed in front of stores and restaurants
– Possibly from people directly contacting you about such opportunities where they got your name
from a job ad that you responded to or from your name being given to them from a recruiter
For those individuals looking at such opportunities I can only advise you that you need to control your emotions of owning a business and investigate the opportunities in significant detail.
Recheck all information and analysis several times by many people in addition to just yourself.
Utilize your friends, associates, and other peer groups to help evaluate the information that you have gathered on the possible business opportunities and ventures.
These other people may give you ideas of other important details and information that you need to gather.
Do not forget to check the Better Business Bureau and the other sources that have a reporting service as to businesses and companies’ ethics and workings.
The Better Business Bureau is one of several sources of such information with much being Free and right on the internet.
Seek out both people who are supposedly successful in the business opportunity and also those who have not been successful at it.
Get all of the facts and details to the entire opportunity.
Do not get caught up on any hype or excitement.
Such opportunities need considerable detailed investigation just like when companies are investigating other businesses to purchase.
Let’s now briefly discuss the economy in a very fundamental way as to lay some basic ground work.
Both consumer and businesses purchasing that help drive the economy and jobs, can be viewed as a big funnel.
Products and services move into and through this funnel emptying into the market to be used and consumed.
You can only put so much product and services into this funnel before it gets backed up.
The bottom opening of the funnel is only so big.
Over production and any market demand decreasing, will affect the size of the bottom opening of the funnel.
When there is an increase in unemployment and businesses have a down turn in sales and profits, both consumers and businesses may decrease spending money.
The bottom of the funnel opening may get smaller causing the funnel to backup or choke, since it struggles to drain off the products and services being poured into it.
New technology and innovative products over time will help open up the purchasing funnel, eventually.
Products and services will eventually get old and used up or consumed, causing a bigger demand for newer and better products and services.
The term “product life cycle” often is used to describe some of this.
If other geographical markets around the world open up to products and services, this could help open up the bottom of this funnel to make it a little larger opening to help move products and services faster.
If these other geographic markets put more products and services into the funnel than what they are consuming, this can cause the funnel to choke or backup.
These are just some of the challenges to having a global economy.
As you can see, keeping the domestic economy balanced and healthy can be complicated.
A healthy job market in the country certainly fuels and supports a healthy domestic economy.
This is fairly obvious and is accepted by most economic professionals.
In this library or article, I will not be discussing how to improve the country’s economy.
I will leave this to the academic scholars, professionals, and politicians that you hear in media, daily.
My only intention for discussing it at all and relating it to a funnel, is to help give some fundamental understanding to what affects the business climate which in turns affects business acquisitions and possible diversification.
Many businesses and companies have entered into tough economic times with decreased sales and profits.
This has forced employee layoffs and forced the companies to seek out other possible businesses to acquisition or purchase to help increase total sales and profits.
If one business or division of a company is down in sales and profits, there is more importance of having other divisions or companies owned that can contribute to sales and profits.
Profits are needed to pay the bills, run the company, and avoid layoffs.
Whether you are a business owner, president of a company, or an individual looking to purchase a business, there are several fundamental things that are important.
1. the need to conduct a thorough and detailed investigation into the opportunities beyond the promises and glitter of owning the new business
2. the need for such an investigation being far more than the traditional approach to avoid the pitfalls that can contribute to failure
3. the need to thoroughly understand what you are getting into and the actual value of the business that you may be considering investing money or time in
4. the need to understand that you must go beyond the traditional approaches of how to evaluate new businesses
When considering a new business to start or purchase, let’s look at the possible outcomes of the new business.
1. the business is profitable to your satisfaction
2. the business is not profitable enough to your satisfaction
3. the business is not profitable but at least breaks even and covers all costs
4. the business is not be profitable and you actually lose money
Looking at the four outcome possibilities, it should be obvious that the outcome of choice or the one that should be preferred is #1 which is to make profit to your satisfaction.
Since this is one of four options, this is only a 25% chance.
The rest of this library and subject will focus on how to increase your chances of obtaining the better outcome of a profitable business to your satisfaction.
There are numerous reasons and strategies for purchasing other businesses and companies.
Establishing such a list will help guide a search for possible purchasing or acquisition and also for the details needed in the evaluation of each potential.
Just some of the strategies and reasons can be;
1. Expand product or service offering to existing customers that have a need for such
2. It may be less costly to purchase a company that already has such products or services than to try to start to produce or offer them yourself
3. To gain the expertise or physical capacity to produce other products and services it may be better to purchase an existing company already furnishing such
4. To obtain more production capacity for your current products and services
5. Eliminate a competitor by purchasing them
6. Eliminate a company or business that could become a competitor to you
7. Purchase a company to prevent your competitor from getting it to block them
8. Purchase specific companies or businesses that are currently doing business with customers
that you need or desire to do business with. Gain entry into targeted accounts quickly.
9. Purchase specific companies to obtain their distribution and sale networks
10. Purchase companies to obtain their technical expertise and any patents
11. Purchase companies to enter a market with your current products and services. This is often faster and more cost affective than trying to enter a new market as a new business.
12. Purchase a company to acquire their staff due to their expertise and customer relationships.
13. To expand geographically whether domestic or international.
14. To acquire companies with additional, better, or newer equipment for various operations.
15. To expand into other markets to reduce risks of relying on your current product & service offering and the markets currently in. Finding a way to keep sales profits coming in even if a division or market takes a down turn. Spread the risk over several markets and divisions.
16. To acquire newer technology, products or services that have greater market potential when your current offering is entering their “end of life cycle” with sales and profits declining.
17. To have other production capabilities or physical locations and to spread your labor force over with the ups and downs of market demands. Example; one product line has sales down, you can shift some of your staffing over to another product or production to meet demand to avoid lay offs or having to increase hiring. Keep your labor force steady and retain your well trained employees.
18. To have another facility located in another geographic area as part of a disaster plan.
This is often appealing to customers to assure them that their products or services will continue even if one of your facilities has disaster such as a tornado, flood, or fire.
19. To enter a new market and offer products or services before your main competitor does so. First into a market with new products or services can establish market share quickly and create significant blocks and hurdles for the competition to get over, preventing them entry.
20. You may have outgrown your current facilities and operations and it is not financially wise to try to remodel, expand, or upgrade. Purchasing another company with the appropriate facilities capabilities could be a wiser move plus expand products, services and markets.
21. Purchase a supplier or vendor of raw materials to help control your cost and material availability.
This also could possibly put up barriers to competition relying on such materials.
If competition needs the raw material and you control a major amount of what’s available, you can control what they can obtain and influence their costs possibly forcing them to higher costs making them less profitable and less competitive with you.
You can control needed resources to your own benefit.
22. To grow your company in a way that prevents an unwanted hostile takeover or purchase of your own company.
23. To position your company to be worth more money and drive up your price for a possible sale and attract good potential buyers.
24. Find distressed companies with good potential but with considerable wastes and poor management causing lack of sales and profits. Purchase them and approach with an aggressive “Turn Around Management Effort”. Then resell for a good profit when improvements are complete and value has increased.
More reasons and strategies can be added to this list.
Once a list of all of the needs and reason for purchasing another business has been established, this then becomes the framework for your strategy to search out possible acquisitions and businesses to purchase.
Such a list also becomes the framework for the detailed information that is required for all potential companies and businesses being considered to purchase.
When discussing a possible purchase of someone’s business or company, it is very natural for them to want to inflate their value and dismiss their own problems and issues.
This is why part of your investigations and search for detailed information must go beyond reviewing financial reports.
To obtain detailed information not found on the financial sheets you can utilize other simple methods.
1. Ask questions of the company’s suppliers
2. Ask questions of their customers and accounts but be very diplomatic and through appropriate channels without alarming anyone.
It is important to know if their accounts will be increasing their business or decreasing their business with them and why.
Find out what is needed to d more business with the customers.
3. Ask question from their management staff and employees.
Ask about staff skill sets, education & experience in each department.
Ask about any quality improvement accomplishments and objectives.
Ask about processes set up to obtain efficiencies and effectiveness.
Ask about if they had more staff, resources, and funding what they would do different.
When speaking with purchasing or material management inquire about efficiencies in scheduling incoming supplies and obtaining the best costs possible.
Do the same with all departments including sales, marketing, production, service, customer service, quality control, and accounting.
Do not forget to speak with the receptionist, maintenance, and the janitor. You will be surprised on how much they know and the insights that they have of the business.
If they use external sourcing for services, speak with them, as well.
4. Inspect and review their capital equipment as to functionality, how current it is, the capabilities, capacity, and can it be integrated with your equipment.
This to include production equipment, telephone systems, fax machines, copy machines, telephone network, personal computers, and computer network, and any other equipment.
These details will uncover significant expenses that you could incur later or avoid later.
This will avoid surprises of future costs not expected and obviously should be considered when determining value of a possible purchase.
5. Compare number of employees in each department currently employed compared to the last 3-10 years or at least compared to the last 3-5 years.
This will give you an indication of any possible business changes per department whether good or bad.
Whether good or bad, you will need to get the details of it.
6. Analyze sales and profits by specific products and services.
This will show you specific profits and losses based on products, services, markets, and company’s expenditure of profits, sales efforts, and resources.
This is important to know to judge waste, potential, and value
7. Compare products and services to the market.
8. Find out what patents or special technical knowledge or expertise they may have
9. Review the backgrounds and skill levels of management staff in all departments; education, continual training, experience.
Staff with good skill sets and education reflect a well run organization and a good business situation to be able to retain such staff.
Lack of good skill sets and education reflect a poorly run organization and one not capable of attracting or retaining such skilled staff.
This would indicate deeper problems and issues to investigate and be aware of.
To obtain such information you can retain a business consultant to help with this.
This information will be important to you, your banker, attorney, and business broker to help determine a fair value and also to avoid over paying.
The information will also help to avoid falling into a “money trap” where you incur a lot of unexpected expense later.
There is a general business saying that states “All businesses are for sale at some price and at some time”.
Keeping this in mind, a search for a business to purchase or acquisition should go beyond just those businesses or companies that are publicly listed for sale.
All companies and businesses are approachable if done professionally and with respect even if they have not announced that they are interested in selling, currently.
A professional but courteous conversation with the executive of the business or company that you may have interest can open up productive conversations.
During an aggressive search campaign utilizing the following list will often turn up friendly and professional intermediaries that have already cleared the way for possible conversations with companies and businesses.
There are several methods that can be utilized to locate potential companies and businesses to purchase.
1. Networking within a markets professional trade associations
2. Networking in sales, marketing, and advertising professional associations
3. Networking within a markets professional consultants
4. Networking within a markets professional publications management staff especially the advertising executives of the publications.
5. Networking with professional PR and advertising agencies.
6. Networking with banks and the loan officers
7. Networking with legal firms & attorneys
8. Networking with accounting firms & accountants
9. Networking with the professional business associations including chamber of commerce, and other clubs & groups
10. Networking with independent representative sales agencies
11. Networking with distribution and sales channels
12. Inquiring with the target market key accounts what companies or suppliers that they would suggest that you inquire into
13. Business brokers
14. Recruiters and executive search firms. They often have the inside track as to what companies want to sell or needs to sell.
15. Read publications in your targeted markets for any news articles on companies or business that could be a target. Research older dated publications as well.
16. Watch the ads in trade journals, magazines and general newspapers on businesses for sale.
17. Place ads in any or all of the above
If you feel uncomfortable having your staff do any of this, you can retain business brokers and business consultants to do this for you.
Their fees for such will be a fraction of what they can save you and earn you.
Be creative on how to tap into all of the networking that is needed.
Utilize your staff plus your own outsourcing professional services people that you do business with.
Ask your own attorney, banker, and accountant to ask around for you.
Ask if you can accompany them to their local professional association’s dinner meeting as a guest to help network.
You may even give them a good reason and incentive to attend one of their local professional dinner meetings.
As you can see there are numerous methods to locate possible companies and businesses to purchase.
The best buyer is a well informed buyer.
Remember the Latin phrase of “Caveat Emptor” which means “Buyer Beware”.