Deciding to buy a company is not a decision that should come lightly. If you have made this decision to buy a company instead of starting a company there are many things to consider.
The reasons behind why someone buys a company can vary greatly. Whether the motivation is to buy a competitor, buy a company in a new niche or to cut the startup time needed were you to start from scratch. All motivations will boil down to 5 things that must be considered first.
These 5 factors we have compiled for you are going to be vital to any English entrepreneur looking to buy a company.
The factors we have listed are universal regardless of your motivation, niche or budget. It would be advisable to consider each of these points thoroughly before you decide to buy any company.
Even the most experienced entrepreneur has been bitten at some point because of due diligence or a lack thereof. Learn from the mistakes many have made before you.
1. Time vs Cost
Every company across the UK and indeed the World are in a constant give and take when it comes to time versus cost.
Buying a company as a business decision is no different.
Depending on your reasons for looking to buy a company you really need to consider if the the cost of the venture is worth it when compared to the time.
For example paying £2000 for a new dropshipping website with over 2000 products may seem like a good deal.
However, if you consider that you could hire a programmer to make an almost identical website and use the same supplier that this dropshipper is using then it may skew that opinion. Add on to that a price tag around 50% lower and suddenly buying that website is a poor decision.
If you can make the website yourself then that’s even better. But if it will take you a month to make then we are back at the time vs cost dilemma.
If the company has intangible assets such as a heavy client list then this will also need to come into consideration. Recurring payments can be priced in with relative ease. However, a list of 1500 former customers may be a little harder to factor in potential time costs. Trying to calculate the time it would cost to get those customers on your own is harder still and many times cost will outperform time.
Everything you consider needs to come down to time vs cost. Time is money and spending vital funds when starting a new venture isn’t always a good idea. Those funds may be better suited on advertising or scaleable technology.
2. Want vs Need
Now that we have qualified that the company we would like to buy wins when it comes to time vs cost, it’s time to look at want vs need.
Do you need to buy the company or do you want to?
If you feel that it would be nice to not have to build a website or create a brand. But you desperately just want to be a business owner then you really need to step back and look at the situation.
Many English entrepreneurs have mistakenly bought a small company via sites like Flippa to get started. Whilst the intentions of being a business owner are noble, you need to question if it is out of laziness or necessity.
What we mean by this is could you possibly do this yourself without trying to get it all right now? Many entrepreneurs will tell you that working from the ground up on a venture is the best way to build on your passion and is far more rewarding in the long run.
If for example you don’t have the skills to build a website or your time to do the project would far outweigh the cost of outsourcing then by all means this is a different scenario entirely. In these circumstances you need to buy a company more than you want to.
Bare in mind that this question can be clouded by emotion. Be honest with yourself, do you want to buy it or do you need to buy it? If it is want then be honest with yourself. This is your journey and this is your first step to becoming a self employed entrepreneur.
3. Your Expectations Of Buying The Company
So to recap, we should now have decided that the time vs cost weighs up nicely and you need this venture more than you want it, it’s time to set your expectations.
Setting expectations for a company you are looking to buy is very similar to creating a business plan and projecting it’s finances.
As we discussed in What is Turnover, Gross Profit And Net Profit, having good understanding of company finances is just one of the many hats an entrepreneur must wear.
It could arguably be the most important of responsibilities since there hasn’t been a company that has survived without profits. After all a company’s aim is solely to make profit.
When buying any company the seller should have already made you aware of the finances that the company finds itself in. Looking at past turnover, profit and customer retention will help you to project but should not be solely relied on.
There have been a number of cases especially online where sellers of companies have inflated numbers and faked traffic/financial details. They do this to scam a potential buyer into overpaying, so due diligence as always is needed.
If you are confident in the numbers then predicting growth and expectations can be simple. Using percentage growth based on previous income and potential changes will at least give you a good place to start.
Be honest with what you want to achieve by buying this company. Be honest with when that can be achieved, if ever.
Buying a company is an investment which needs to be bought with your head over your heart. If you can’t be honest with yourself and your expectations then you will struggle further down the line.
4. Customers and Niche
One of the top reasons to buy a company instead of starting one comes down to the customers and niche.
Over saturated markets are mainly busy because the demand for the niche is huge and the barrier to entry is low.
In more closed off niches where the demand is lower due to the niche being narrower it can be very beneficial to purchase instead of entering. This mainly boils down to the limited audience: whilst they may be profitable, tearing them away from a rival takes time.
When it comes to companies on the other end of the scale in over saturated markets the benefits come back the bigger the company. Buying smaller companies is rather pointless when they control less than 1% of the market but acquiring customer details for 20% of the market could be game changing.
So take all of this into consideration. Depending on the customer base and the niche you are entering you may need to rerun this past the time vs cost dilemma above.
5. Ask The Seller, Why?
So the company is great, their financials are solid and they have a huge recurring customer base.
That’s great, right? Kinda.
If it sounds too good to be true then it probably is.
Be careful! If the company you are researching has huge upsides and no downsides then your spider senses should be tingling. No company is all smiles and no problems, nothing is perfect.
Check check and recheck the financials, infrastructure, ask for a guided tour multiple times and tick every box 3 times.
Most importantly ask the seller why he is selling. If this is such a money maker with growth potential then why let it go at all? If you owned this company earning £x a week would you sell it? Would you sell it for this price? Is there still a future for the niche?
Don’t be shy when asking a seller details. A seller should be doing everything in their power to help smooth the process. It is their duty to disclose everything surrounding the company.
Ask as much as possible and write it all down. Keep records of everything. Don’t be rushed into a decision and be sure you are making the right decision for you and your company.
Buy with caution and be vigilant – this could be your biggest decision you ever make.
