Purchasing a Business: Using Business Acquisition To Achieve Growth

Business Acquisition and Growth

If you are looking to grow and develop your business, one of the fastest ways to do so is via the acquisition or purchase of an existing business. Business acquisitions require extensive experience and a thorough understanding of the process, including obtaining financing and conducting due diligence, but can be a highly rewarding long-term investment.

When undergoing rapid expansion, acquiring smaller businesses that offer the same product or service as you can provide you with the added knowledge, manpower and assets to increase your percentage of market share.

Reasons Why You Should Buy a Business

When looking to develop your business as a business owner, you will be thinking of alternative routes you could take, for example increasing your marketing activities. However doing so carries an element of risk as you could invest a lot of money into a campaign and find that you don’t get a return due to poor segmentation, or lack of interest.

Purchasing a business will give you access to an existing customer base. You may currently offer more services or products than the business you are purchasing and you might find scope to upsell more of those to their existing customers.

A business purchase involves complexities that can be navigated with the support of experienced M&A advisors, who assist in planning, decision-making, and ensuring successful outcomes.

An existing business can be observed, you can see what works, what doesn’t work and what it could do better. The uncertainty is less than starting a business from scratch.

You will benefit from the existing infrastructure. Existing employees will likely be competent and knowledgeable of the business. This removes some of the guesswork which comes with starting up a new business. The acquisition of ongoing operations and relationships means that the buyer can inherit established banking connections, strategic alliances and ongoing relationships with trade suppliers.

When is the Right Time to Buy a Business? Understanding the Due Diligence Process

In many industries, timing is key. It is crucial to research the sector you’re interested in and shortlist two or three businesses before making a decision. Those who purchase an existing business in the first few months of the New Year are in the best position to be up and running by the summertime.

Industries such as retail and leisure experience a significant sales spike in the holiday seasons. Allowing yourself time to establish a customer base before your business’s busy period will reduce the risk of alienating customers. However, the timing of your acquisition should also align with market conditions and economic indicators specific to your industry.

For example, acquiring a business during a market downturn might provide opportunities to negotiate better terms and a lower purchase price, whereas purchasing during a peak season might come at a premium but offer immediate revenue boosts.

Conducting Thorough Due Diligence

Understanding the due diligence process is paramount to making a sound investment in the right business. Due diligence involves a comprehensive review of the business you’re considering purchasing, ensuring you’re fully aware of its financial health, operational stability, and potential risks. Here are key aspects to focus on:

Financial Due Diligence

• Review Financial Statements: Examine the business’s income statements, balance sheets, and cash flow statements from the past three to five years. Look for consistent revenue growth, healthy profit margins, and manageable debt levels.
• Audit Tax Returns: Ensure the business’s tax filings are in order and verify that there are no outstanding tax liabilities or disputes.
• Evaluate Expenses: Scrutinise operating expenses and identify any irregularities or areas where costs can be reduced.

Operational Due Diligence

• Assess Management and Staff: Understand the roles and responsibilities of key management and staff. Evaluate their experience, skills, and commitment to the business.
• Examine Business Processes: Review the efficiency and effectiveness of the business’s operational processes. Identify any bottlenecks or areas for improvement.
• Check Supplier and Customer Relationships: Ensure that relationships with suppliers and customers are strong and that there are no impending issues that could disrupt business operations.

Legal and Regulatory Due Diligence

• Verify Legal Compliance: Ensure the business complies with all relevant laws and regulations. This includes employment laws, health and safety standards, and industry-specific regulations.
• Review Contracts and Agreements: Examine all existing contracts, including leases, supplier agreements, and customer contracts. Identify any clauses that could impact the business post-acquisition.
• Check for Legal Issues: Investigate any ongoing or potential legal disputes that could pose a risk to the business.

Market and Competitive Due Diligence

• Analyse Market Position: Understand the business’s position within the market. Evaluate its competitive strengths and weaknesses.
• Review Industry Trends: Stay informed about current industry trends and future projections. Ensure the business is well-positioned to capitalise on these trends.
• Evaluate Competitors: Identify key competitors and assess their strengths and weaknesses. Understand how the business you’re acquiring stands out in the competitive landscape.

The Risks for a Business Owner

Of course, as with any business venture, purchasing a business carries certain risks. Conducting legal due diligence is crucial to investigate and understand potential legal issues, ensuring that all concerns are disclosed and thoroughly addressed before closing the deal. 

For instance, neglecting to clarify the seller’s potential liabilities can leave you in a difficult position, facing unforeseen challenges that could have been avoided. Therefore, it is essential to seek the right advice and guidance to navigate these complexities effectively.

During the due diligence process, it is important to record key findings to ensure nothing is overlooked or forgotten. To find out how Aston Shaw can help you create and develop a detailed business plan, contact us today.