Step 8: Buy another business

Growth can be achieved through purchasing other businesses. Acquisitions are usually a:

• Similar type of business, either a competitor in the same market or a similar business in a new market
• Key supplier, to guarantee raw materials or exclusive supply, or to reduce your costs
• Customer, to guarantee the sales channel and take advantage of new business models
• Complementary business to form a strategic partnership that will be more competitive and able to enter new markets
• Different business altogether in a market you are looking to diversify into.

Either use existing cash or ensure the new business has enough cash flow to assist the financing of the purchase cost. Also seek professional advice and talk to your banker to discuss the wider implications of buying another business. One of the most difficult aspects you will face is focusing on two businesses at once. Once you have more than one business both will make demands on your time, so delegation, time management and prioritisation become critical.

Checklist for buying a business

If you do decide to invest in another business, then consider the following:

• Check all legal and accounting disputes have been resolved
• Make sure any legal or tax issues are settled
• Have leases formalised in a way that’s acceptable to you.

Assess the financials

• Be certain that the accounts are in order, accurately reflect the business’s value and give a true presentation of profits
• Double-check to make sure the seller has included all the information you need.
• Get access to the last three years of financial records, particularly sales and profit figures, so you can examine business performance. You’ll also want to know if the business is turning over stock quickly and showing future profitability.

Highlight any unusual items

• Investigate any unusual items such as discontinued operations (like recently shutting down a unit) or a change in accounting principles so everything is out in the open. Make sure your accountant reviews any unusual items on the books for the seller to explain.

Reduce the risk of buying

• Speak with staff about your sale plans and find out if the owner intends to release all the current staff
• Discuss the sale and transitional period with your key staff members in your current business
• Your professional advisors are critical before, during and after the purchase of a new business
• Prepare confidentiality agreements
• Speak with your accountant about how to structure the purchase.

Make sure to retain value of the business

• Consolidate any contracts with long term customers.
• Firm up any supplier or distributor agreements. Document any favourable terms with their supplier(s) so you can lock them in for your future benefit.
• Don’t buy any redundant assets. Depending on the condition or age of certain assets, you may not need to pay for old or obsolete assets and inventory if you don’t want or need them.
• Review the expenses to see what can be tightened up. Speak with your accountant, lawyer, broker, banker and other advisors to form a plan.
• Identify any intellectual property rights that you will inherit: the name or logo as a trademark, a patent on a new product or process, or any trade secrets.
• Document copies of licenses or permits that the business needs licenses to operate legally.