When you buy a business that’s related to your own, it can fast-track your business expansion. But buying a business doesn’t come without risks and challenges.
Are you a small business owner considering ways to expand your business? Chances are, you’re already looking into obvious paths to growth, such as more and better lead generation, more networking, providing incentives to current customers for referrals, and all of the other growth hacks that you read about in how-to articles on the Internet.
But, there’s another path to business expansion that’s less talked about: buy a business that’s related to the one you already own. Doing so is arguably easier, and much faster than traveling down the road of traditional growth. It comes with risks but I found it to be my preferred path to expansion. Below is what I’ve learned after going through this process a few times in my own business. I hope hit helps you take the first few steps towards expansion.
How to Buy a Business – A Step-by-Step Playbook
Let’s not fool ourselves. Acquiring another business isn’t as easy as getting on some website that lists businesses for sale, picking a business you want to buy, and clicking the “buy now” button. The process is slightly different in each situation but here’s a sample playbook:
- Research– Figure out what people are paying for a business in your industry and your region. It’s different for each business type. There are a lot of articles on valuing a business so let’s not dive into that here. Once you figure that out, decide if you can afford the financial risk of buying a business.
- Save Up– Don’t waste your time or the prospective seller’s time by having conversations before you know how you will pay for the business. This may be through a loan, cash, royalty payments or often a combination of numerous ways. Get this squared away before going much further.
- Identify– Find a business that could be a possible fit with your current business. In most cases, what you will be looking to buy is a business you can absorb into your current business. You’re not looking to try and operate separate businesses. There are websites that list businesses for sale. You could look there as well.
- Approach– Start a conversation with the owner. Sometimes they’re looking to sell and sometimes they’ll entertain the idea of selling if they know you’re serious. Don’t only look for “For Sale” signs. Approach owners that haven’t thought of selling as well. If the business is selling through a broker, you would start conversations with the broker.
- Due Diligence– We’re now into the section where you may need to call in experts. Due diligence involves combing through the entire business including financials, examining the location, talking to employees, talking to customers, and analyzing the market. You will likely need an accountant to look over the books, an attorney to examine the contracts the business is under, and other experts as things come up that are outside of your expertise. Most important, don’t be afraid to walk away. If the due diligence process makes you feel uneasy about acquiring the business, walk away. There will be other opportunities that come along.
- Make an Offer– If you like what you see, it’s time to make an offer to purchase the company. You already figured out your personal finances and budget so start the negotiation process. Almost all business owners believe their business is worth more than it actually is. That’s a hurdle that can be hard to overcome but stay disciplined. You know what your due diligence told you. Hopefully the deal works out. If not, you’ll be starting this process again with another business before you know it.
- Assimilation– Assuming you bought a business that is in the same industry as your own, you will likely absorb it into your own. This makes accounting, HR, and general management much easier. Most local small businesses don’t have the brand recognition that would make you want to keep it under its old name but don’t rule out that possibility.
- Weed Out– Businesses don’t grow when they try to be all things to all people. Know your mission, know who you service, how you service, what you charge, and your geographic boundaries. For any current customers that don’t fit into this, refer them to somebody else. Serving customers outside of who you are might be attractive from a money standpoint, but they take too many resources. Do the same with employees. If they don’t fit into the mission of your business, they probably need to be let go. Please, treat them well. Offer them a severance package so they have money coming in while they look for another job.
Although the process laid out above appears very scripted, objective, and straightforward, the reality is that buying a business comes with a lot of emotion. You’re purchasing something that’s very personal to the owner. The owner may try and hold on tightly, they might be mad when you question why parts of the their business aren’t running as well as they should, they might be in denial as to the state of their business, and they might be worried that you won’t treat their employees well once you purchase. Put on your patience hat. If you’re truly interested in buying the business, some coddling of the owner will be necessary. Always remember that you would likely be the same way if you were selling something that took you years to build.
Next, if you’re purchasing a business for the first time, look for the one or two-person operation that isn’t so much a business. Many people get into an industry but find they can’t grow enough to really make it a long-term career. In this case, you’re simply buying their customers. This is a much easier process than buying an established business with complicated financials. Related, look for somebody who is close to retirement who built a heathy side hustle.
Again, you’re buying the customers versus buying a thriving business that can stand alone outside of the owner. The “business” that isn’t actually a business is a prime target for acquisition.
Finally, know the attrition rate in your industry. Any time you purchase a business you will lose some percentage of the customers. They might see you as the bad guy who bought out their best friend or they may use this as a time to re-evaluate their vendors. You can find attrition rates for every industry. Look for trade organizations you can reach out to. When you make your offer, valuation should be based on some multiple of revenue minus the expected attrition rate.
Finding new customers is a long, hard, frustrating, and expensive experience. You may have to hire a sales team, create media for advertising, and comb through the Internet looking for possible leads. Purchasing an existing business takes care of all of that headache and brings you a lot more business very rapidly.
But don’t be fooled. Purchasing a business comes with risks and your current business must be prepared for the influx of new customers. The last thing you want is to bring more customers through the door but lose them because you weren’t prepared to service them well.