Posts Tagged ‘due diligence’

Buying A Company As Part Of A Growth Strategy

Tuesday, June 4th, 2013

Acquisitions fail far more often than they succeed. You can easily find statistics to prove that.Acquisitions fail far more often than they succeed.

If you’re not a numbers person, then you only have to think of AOL and Time Warner; and News Corp and MySpace.

Those are all big corporations, I know, but it’s nice to see the big guys get a bloody nose every now and then.

Buying another company, as part of a growth strategy, isn’t something that we see often.

It’s probably done most frequently when a client buys a smaller competitor in a Province, State or country they’re not already in. They’re quickly expanding their existing business by adding experienced sales, service and support staff where they had none.

What’s even less common is seeing a client buy a company whose products and services are “complimentary” to theirs.

There’s a lot for privately-owned businesses to worry about with acquisitions.

For a start, there’s getting a fair valuation for the target company and being thorough in due diligence to make sure nothing is missed. If a ‘biggie’ like Hewlett-Packard can make a mistake (with Autonomy), then anyone can.

Then, when the deal is done, there’s the whole challenge of integrating the people, who may be used to doing things in a completely different way. Not to mention different (and often incompatible) accounting and CRM systems.

When business owners buy a company for the first time, they often underestimate the lack of direct control they have over their new acquisition. And it seems to increase with the distance between the parent company and the new one. (Compare driving across a city to flying across the country to “sort something out”.)

So, why bother?

Because, like many things in life, it’s not what you do, it’s how you do it. Go back to the ‘biggies’ again for a moment and think about Google and YouTube or Best Buy and Geek Squad. Done well, acquisitions provide a great return on investment.

There’s research that says if a company is bought to expand the existing business, then it should be absorbed into the buyer as quickly as possible. Signage, letterhead and all other image stuff must be changed to that of the parent company. Duplicated or conflicting processes and systems must also be replaced. But if the acquisition is made to complement the buyer’s business, then the new subsidiary is best run separately and left with it’s own identity.

Which makes sense if you think about it this way. ABC company buys XYZ company.

If the XYZ is same business as ABC, the owner and management team at ABC already have been successful in that business and, hopefully, know why. XYZ should be folded into ABC.

If the XYZ is in a separate, but complimentary, business or industry, XYZ’s owner and management team have presumably been successful. Otherwise, ABC would have bought another company. So ABC should leave them alone.

All of which will make watching Yahoo’s acquisition of Tumblr interesting…..

 

If you enjoyed this post you’ll also enjoy Are Your Core Competencies Coming – Or Going?

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How to Save Money When Buying a Business

Tuesday, January 8th, 2013

Our guest this week is Mark Toohey, Legal Director at ADROIT LAWYERS in Australia. Mark is an experienced commercial lawyer who has worked with both major law firms and as General Counsel in the media, telecommunications, software and IT industries. Read more about Mark below.

 

Buying a business is horse trading. As any good haggler knows, you need to go into the negotiations armed with reasons why the sale price should be lowered.

Here are some tips that may help you to pay less to buy a business.

Some of these tips are ways to justify your insistence on a lower price for the business you are considering buying. Others are tactics and strategies that will help you to get a better deal or make a wiser decision.

The process of looking into a business and determining its worth is known as due diligence. It is best to get professional and/or legal advice and assistance to conduct those investigations. A due diligence checklist is always a useful tool.

As I have explained elsewhere, a seller can use due diligence to justify a higher sale price. Equally, an astute buyer can use the same process to unearth facts that support a price reduction. It really is a two-edged sword. So, make sure you get good advice and wield it properly to your best advantage.

Armed with credible information gained from due diligence you can quite reasonably demand a lower price that takes the risks and shortcomings of the business into account.

Here are some methods to reduce the purchase price of a business and to pay less.

1. Look for indicators of a distressed sale.

• business owner is retiring;
• poor financial position;
• urgent sale schedule;
• been on the market for a long time;
• sale price has been repeatedly lowered;
• disputes between the owners;
• changing legislative conditions; or
• changing market conditions.

2. Look for performance reasons that support a price reduction.

• declining sales;
• diminished profit margins;
• poor financial record keeping; or
• poor administrative or legal record keeping.

3. Look for signs of shoddy management practices.

• low returns on investment;
• bad administrative practices;
• bad employment practices;
• threatened or actual litigation;
• high number of customer complaints;
• high refund or repair claims;
• continual discounting;
• poor marketing results.

Key Factors

Two key factors regarding price are:

1. Knowing what it is currently worth.
2. Knowing what it could be worth in the future.

We’ve now covered the first steps of conducting due diligence and determining the worth of the business you may buy. Once you have investigated things and found the flaws in the business (they exist in every business) you should then have a good idea of the price that should be paid.

Positive Steps

The next step is another investigation, but this time it is with a positive twist. You should next look at what changes could be made to the business to improve its performance or to turn things around. Of course, this involves a frank assessment of your skills and the financial or other resources that you have available.

You should also make a candid assessment of your own strengths, weaknesses and capacity. Assess whether the potential upside is really worth the time, effort, expense and distraction from your current operations.

Analyse the business’ financial position and sales performance and look for ways that you may be able to turn the business around.

Some proven business transformation methods are to:

• cut wasteful expenditure;
• cut staff levels and only keep the high performance staff;
• lease cheaper premises (provided this will not adversely affect sales);
• sell underperforming assets or business units;
• reposition the products in the market;
• release new products.

About Mark Toohey

Mark has been a lawyer, company director, marketing director, company secretary and entrepreneur. Mark’s commercial experience extends way beyond the theoretical. He has helped launch a number of start-up businesses and his hands on experience was gained from negotiating and documenting deals for a wide variety of business initiatives. To learn more about Mark, go to http://www.adroitlawyers.com.au or you can contact him at mark@adroitlawyers.com.au.

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