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Why acquire an existing business? Add to ...

Growing your business internally can be a sluggish and high-risk strategy in a fast-moving business world. That's why many entrepreneurs choose to acquire an existing firm instead.

This strategy eliminates many of the headaches involved in getting a startup off the ground, such as developing products, hiring the right people and building a sound customer base. It also gives entrepreneurs a jump on the startup phase - a time when many new businesses fail. It's often the only feasible way to break into a particular field, such as tourism or manufacturing, since startup costs in these sectors can be prohibitive.

There are distinct benefits when you buy a business that is already up and running, but you may also be acquiring someone else's problems. Here are some key points to consider:

  • Customers. If the business you are eyeing has an established customer base, you will pay more for "goodwill" when you buy the company. Still, such a firm will also give you better access to immediate cash flow and a chance to improve on existing business relationships.
  • Operations. If the business has been fully tried and tested, you can eliminate the groundwork involved in getting it up and running, since operations, distribution and supplier relationships, not to mention key personnel, are already in place. All of this saves you time and money and the previous owner can often provide useful insights on running the business.
  • Product. The inventories in an established business and the profitability of its product line can alert you to what works well and what needs to be improved in order to boost sales and free up resources for marketing.
  • Employees. Workers who have been with the company for some time can provide insights into the business and industry as a whole.
  • Financing. A proven track record and existing cash flow make it easier to obtain additional financing. Also, when buying a company, its business plan and records are already in place to help guide your decisions, allowing you to more easily forecast short- and long-term profits.

Some additional tips

  • Stay in the area you know. Don't fall into the trap of buying a particular business because it seems like a sure thing. Pick an industry you know intimately and look for a business in that industry that is for sale. Then evaluate it carefully. Due diligence is one of the most important aspects of a business acquisition. Think carefully about whether the business falls within the scope of your business plan and area of expertise.
  • Look for the right fit. Evaluate your skills, interests and experience. It's much more difficult to succeed in a business you don't like or in which you have no background. The business you buy has to mesh with what you do well, and with your personal and business philosophy. Choose familiar territory to reduce the risk of failure.
  • Evaluate the risks. Determine through research whether this type of business has a solid chance of turning a profit. Certain types of businesses are riskier, more vulnerable to competition or prone to financial failure than others. None of this means you should automatically avoid such businesses. However, they do require an especially careful evaluation of the risks involved.
  • Look for synergy. If your goal is to acquire a firm to add to an existing business, you will need synergy in key areas. Its products or services should be related or complementary to what your existing business already sells, and marketing and sales methods should likewise be in harmony. Production and delivery methods should also be similar, and the merger or acquisition should result in improved cash flow with which to fuel additional business projects. You need assurance that you will have the full co-operation of the new firm's staff as they will be key to a successful integration of the two businesses. Ask yourself what level of skills and training the employees have and how their know-how can improve your existing business.
  • Look at the firm's identity. Every business has an image that has been built over time. Think carefully before you acquire a business with a tarnished image, as such perceptions can be hard to turn around. Conversely, a good reputation can be a critical asset. An Internet search can allow you to see what people are saying about the company. These opinions may not be representative but should still be taken into account. Ask yourself why the company is up for sale, and ask about its reputation and that of its current owner.
  • Consider the company's culture. You may meet resistance if you buy an established company with its own business culture, management style and relationships with vendors and partners, and then change the way things are done. It's worth asking whether the seller has good relationships with employees and managers, and assessing the business culture, management style and the quality of work done by its employees.
  • Evaluate the costs. Financial records may not always reflect reality. You need to ensure that the price is in line with market conditions. Without due diligence, you can end up paying too much and be left burdened with unnecessary debt. Hidden problems, such as losses, declining revenues or changes in the marketplace, may make the business less viable than it initially appears. If leases for facilities or equipment are about to expire, for example, price hikes may be in the offing. Determine whether the equipment is part of the sale. If so, what condition is it in and what is it worth? Is the building for sale as well? If it is rented, can you take over the lease, and under what conditions? Once you've started your due diligence, don't limit yourself to examining operations and facilities or going through financial statements. You also need to investigate the parts of the business that you can't see physically by talking to employees and suppliers. Evaluating the business' true worth, considering all tax implications and effectively negotiating the sale are also important steps. Finding and researching a business to acquire can be a time-consuming and costly exercise. But sometimes it's well worth the investment.

Content in this section is provided in partnership with the Business Development Bank of Canada. BDC provides entrepreneurs with financing, venture capital and consulting services. To find out more go to BDC.ca.

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