Key Components to Check when Buying a Business

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Buying companies is a great way for businesses to expand quickly, particularly adding sales to the bottom line whilst in some cases not increasing the cost base in the same proportion.

For anyone looking to sell or buy a business there are certain things that are an absolute must on your Due Diligence list before you agree to the deal:

  1. Longevity
    Has the business got what it takes to continue trading over the long term at the current rate at which you are buying? Factors that affect this are market conditions, staff retention, barriers to entry and also disruptors. I would also say that the size of the turnover is also important as when you reach certain levels you become less likely to be reliant on a key member of staff.
  2. The Upside
    Is there potential to improve the business performance and grow? What are the options to create strategic partnerships or even increase sales in new services and products. The average business may have over 5 products but the average customer may only by approx. 1.3 products or services from you so look for the cross sales. Additionally, don’t forget to check the downside and if one customer makes up the majority of your sales then you have a significant risk – strong businesses have a long tail of customers for their revenue streams.
  3. The Culture
    Based on Maslow’s hierarchy of needs you are going to get staff coming to work for you for more than one reason and you have to create a culture that is encompassing for all those motivations. What is the culture of the current business, is this something that can be improved and developed? These are a couple of questions I always ask myself if I can use the culture to improve business performance.
  4. The Staff
    Good staff don’t stay in average companies. Good staff want to progress so there needs to be congruence between the needs of good staff and the business’ goals, mission and vision. I like to see the business as a vehicle for good staff to earn and achieve what they want in life. Retaining good staff retains the culture and the high quality of product and service provided.
  5. The Business Health
    Understanding why someone wants to sell their business is really important, even if the seller feels uncomfortable divulging. Buying a business is creating a win-win between the buyer and the seller. 90% of businesses don’t sell after being listed which I believe is a fair reflection of sellers and buyers not finding a win-win solution. The health of the business can sometimes be irrelevant as long as the seller is prepared to do an earn out. Healthy businesses may also sell because they need further investment to help grow and achieve higher multiples on their valuations.
  6. Your Reputation
    It can take generations to build an empire, but only takes one tweet to ruin a reputation. In today’s world of social media and the ease at which keyboard warriors can make verbal accusations against companies, reputations are much harder to maintain and easier to destroy. I believe that over the next 10 years we will see a huge increase in goodwill towards any purchase price for well kept business reputations.
  7. Senior Management
    The last thing that any new business owner wants is to buy themselves a job. A senior management team that remains in place and is competent to deliver the day to day running of the business is essential in my view. The new business owner wants to focus on how to increase shareholder value from the business and letting a competent management team focus on how to increase sales and