Advice you can count on for
business sellers and acquirers

Buying a business; Article 1 of 3

Many readers may well be very experienced in the subject of buying a business but this series of articles is derived from a presentation given at the Business Show at ExCel in May 2019 and is geared towards the novice acquirer of an SME business who has had little experience of the buying process.

How many people here like to be in the minority?

In the case of buying businesses the successful acquirer will end up being in the minority.

According to industry statistics, over 90% of the people who begin the search to buy a business fail to ever complete a purchase.

I’m going to try to explain why this is and how you can try to part of this minority group through sharing some basic principles of the buying process and some real life examples of what can and does go wrong.

Hi, my name is Peter Wilson and I’d like to talk to you today a little bit about these various aspects of buying a business.

My firm Anderson Shaw is a specialist corporate finance business that helps business buyers and sellers make deals that work and importantly that work for both parties.

So how many people amongst the audience enjoy shopping?

I think all of us do to some extent but some enjoy it more than others.

When you do grocery shopping how many people use a list?

How many just go round and pick up what they think they wanted and then probably a bit more?

If you ‘re in the latter category how many times do you come home with stuff you didn’t really need at all and probably spent too much on?

What about shopping for shoes – how long does it take to choose just the right pair? How many shops do you go in and how many pairs do you try on?

Even then when you get home how many times do you get home and change your mind so you take them back and change them … or worst of all they just sit in your cupboards and you never even use them?

It’s easy just to buy what turns out to be the wrong stuff isn’t it?

For those of you who’ve bought a house, just think about how much time and effort you put into deciding what you’re looking for in your ideal home, then looking at how many different houses on the web selling sites, then decide to go and view probably a decent number and then choose the one you like the best (by the way this is normally some kind of compromise isn’t it?) and put in an offer for it.

Normally there’s some kind of negotiation that takes place and your offer is either accepted or not and if it is then you go through the long-winded process of the legal’s and completion process…. But quite often the sellers don’t accept your offer but someone else’s … and even if they do … something might go wrong in the chain somewhere and it falls through and you need to start again.

Whilst different the process of buying a business has similarities.

The amount of thought and time you need to put into the process is just a lot more.

Earlier I said that industry statistics suggest that over 90% of the people who begin the search to buy a business fail to ever complete a purchase.

Almost even worse than the stats showing that only in less than 1 in 10 business buying searches get to completion, the average person looking to buy a business looks at business for sale listings for 18 months and still, and may never buy one!

Why so many failures?  Most were first-time buyers and they admitted to having totally underestimated just how much was involved with each stage of the buying process. They felt overwhelmed and ill-equipped to handle all of the new situations and major decisions they encountered.

Part of the problem certainly is that many businesses listed for sale are advertised at high and often overpriced values and some may well have plenty of problems. The price being asked may put off a lot of potential buyers and those that do pursue businesses may well find that the asking price is just too rich for them or that they uncover problems that they don’t feel able to overcome.

This means that the buyer normally withdraws from the deal, but pity those that do proceed and then find they ended up buying a bad business.

I’ll return to some of the key issues involved in exactly what you need to consider but let’s start with who buys businesses and then look at the overall cycle that’s involved in buying a business:

What type of person decides they’d like to buy a business…? As we’re focussing in the sme / sole proprietor marketplace for the purpose of this presentation, we’re not looking at major corporate transactions, but rather individuals, partnerships or small owner-managed sme’s in which there may be a single owner or a small number of owners.

Well the answer to the type of person who buys, is actually lots of different types.

It doesn’t follow Maslow’s pyramid theory but I suppose that’s the closest you can get to it.

Probably the typical profile is of a person who has some entrepreneurial personality traits; one who is pretty self-motivated, looking to develop their own ideas or initiatives, potentially has some creativity traits and who is prepared to take some risk in order to get some improved returns.

On the entrepreneurial curve the person looking to buy a business could be along the lines of starting something they’re very familiar with and that maybe they’ve worked in the type of business they’re targeting but actually want to buy one that’s already established rather than start one up from scratch. The decision here may be very tight as people in this category are generally quite risk-averse.

Further up the curve will be people who maybe have a wider brief, they may already have an established business and they’re looking at expanding it or broaden the product or services they currently offer and are prepared at looking at some alternate business types.

Towards the top of the curve are the serial entrepreneurs who have good experience of running different businesses in maybe different sectors and are looking at the next opportunity; these people often look to use other peoples’ money to at least part fund any acquisition and seek to run them as an investment that they don’t necessarily have to work in or understand how the business works fully, but rely on other expertise to do this and they may well be opportunistic in their search criteria.

It’s generally unusual for people who are in the so called “work is necessary to provide enough for them to survive” to seek to buy a business, but even they may do so as a way of getting out of the rat race and being their own boss.

People may seek to buy a business on their own or jointly with other family members, or friends or work colleagues and all these can work as well, but where there’s more than one person involved, the decisions obviously need to be agreed by everyone concerned.

We have found that the majority of people who want to buy a business have already started or run a business themselves and see the business acquisition as the next step in their journey.

So people who buy businesses can come from a wide variety of backgrounds but returning to the various stages of the process, these tend to be quite similar for all of them.

The first stage in the process is planning:

As the saying goes fail to plan and you plan to fail, so what are the planning steps

  • Decision to buy, maybe it’s
    • New venture for you
    • Acquisition to add to existing business
    • Pure investment
  • Determine strategy / reason for decision (needed for funding)
  • Determine Acquisition Criteria
    • If you don't know what you're looking for, how will you know if you find it
    • Research helps
    • Start with some outline criteria and then refine down
  • Talk to people you can rely on and explain what you’re thinking of doing
    • You don’t have to accept what they say but you’ve asked them because you think you can place some reliance on their advice
    • You never know they may have some brilliant suggestions for you
  • How are you going to fund it
    • Own resources
    • External funding
    • Cash or borrowings in other business(es)
    • Set your limits and your funding structure
    • If you need funding try to obtain agreements "in principle" ahead of setting-off on the search

As business brokers, we at Anderson Shaw Corporate Finance Ltd, are always happy to advise business owners about any aspect of buying a business and the processes involved. If you are thinking of buying, now or in the future, please contact us for a confidential, no commitment conversation. We will be pleased to provide support at any stage from  planning, through target setting and evaluation through to negotiating and finalising on a deal.

 


Anderson Shaw has offices on the outskirts of Coventry and provides business broker and corporate finance services for clients throughout the Midlands and the UK.

Read more about us here

Interested in a free Business Valuation? Enter your details here