Business Acquisition 101

7 December, 2012

Is your business growing and are you now looking to add to your business by acquiring another business. Business acquisitions can generate a lot of profit, but they are also high-risk ventures and a bad bet can break an otherwise successful company. Before rushing into any decision you should carefully evaluate the company you are thinking of acquiring, its position in the market, and its financial health.

Does the Target Company Add Value to Your Current Business?

Why are you looking to acquire this company? Is it a competitor that you believe you can absorb? Or perhaps you are trying to cut costs in the long run by acquiring an important supplier to your business? Figuring out whether or not the newly acquired asset will add value or merely be a distraction is essential for making a good business acquisition choice.

The first thing you should consider is if the company will cannibalize your current business. For example, if you own a chain of coffee shops in Sydney and are looking to buy out another chain of coffee shops, will these additional stores simply eat into your pre-existing customer base without adding much value? Or will the newly acquired business allow you to reach a different segment of the market or new and untouched locations?

Does the potential business fit with the current profile of your company and the assets you have on hand? For example, if you own a pizza parlour chain, buying another pizza parlour chain in a different city could make a lot of sense. Buying a grocery store, however, doesn’t as it would most likely decrease your focus on your core area and use up a lot of precious resources.

Make Sure You Check the Financials

You should ask for all of the details for their financials. What are the biggest costs, where are their liabilities? Are there costs and liabilities not being properly accounted for? The devil is in the details and often a company that looks like a good performer on the surface turns out to be a dud after digging a bit deeper. For example, perhaps the company has a lot of long term debts that you will be responsible for but aren’t currently creating a huge drag on the financial sheet. You and your accountants should pour over the financial statements line by line.

Make Sure You Can Find the Funding

In order to make the purchase you will have to have the cash to buy the company out. How are you going to get this cash? One option is small business loans Australia, but if you take out a loan, ensure the profits from the acquisition will cover the interest rates paid on the new business loan and still have enough money left over to justify a healthy profit margin. Another option would be to sell stock in your company, but is the new acquisition worth enough to justify diluting your control over the company? These are all important questions you should consider when making a business acquisition.

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