How to decide whether to purchase another business
As a savvy business owner, you’re constantly looking for opportunities to grow, whether that involves agreeing to an unconventional project or purchasing another business. Buying a business is a big move — one that has the potential to take your company to the next level. But how do you know if it’s the right decision for you?
Whether you’re mulling over a buying opportunity right now, or simply gathering information for the future, here are the key steps to take when making your decision.
1. Examine your motivation.
First, determine why you want to purchase another business. Do you want to buy out the competition to gain more customers? Are you trying to break into a new industry? Or, maybe you’re looking for something to complement and build upon your current business, as was the case for Shelton.
After growing his pest control business into a million-dollar enterprise, Shelton purchased the marketing agency he was working with, in the hopes of building it into a resource for business owners in the lawn care and pest control industries. “The home services niche tends to be behind the times,” he explained, “and there was a real chance to turn this into an opportunity to help other business owners grow their businesses and their teams into the digital age.”
Pinpointing your motivation for buying a second company will help you figure out your goals — and what you need to do to achieve them.
2. Figure out what changes you’d have to make.
Logistically, you need to consider the size and location of the business, as well as its industry, customer base, and competitors. Another important factor is considering how, or even if, your two businesses will mesh together.
“For my first [business],” Shelton said, “I cared a lot about profitability and scalability, so I’d be able to grow it quickly. For the second, I had to consider how it would fit into what I already had.”
Take some time to determine what changes you’d have to make in your current business operations and personal life to successfully grow a second business, as well as how long those changes would take to implement. “When the opportunity came along [to buy my second business],” Shelton said, “I had built a team that was running efficiently so I was able to be less involved in the day-to-day operations.” This allowed him to allocate more time and resources to his second business.
It’s important to figure out whether or not you’re in the position to, say, expand your managerial staff or cut back on your hours if you need to. Shelton said, “My entire business philosophy is all about keeping the wheel balanced — you have to be focused on serving your vendors, your customers, your employees, and your owner evenly.”
3. Take stock of your financial situation.
Purchasing another business is a massive investment, so it’s important to have all the facts before you make an offer. First, examine your current business to see how well it’s performing. What were the last quarter’s profits like? What do you estimate you’ll earn going forward? What are your funding options like?
Confidence in your ability to grow the new company, and knowing you have the resources to support yourself in case things go awry, can go a long way. “I was willing to take a bigger financial risk knowing that I had a solution in mind for something a lot of people in the pest and lawn industries face,” Shelton said. “I also had the success of my first business to fall back on, and a partnership between the two that would reinforce both,” he explained.
Savings are crucial in any case, Shelton added. No matter how comfortable you feel, it’s wise to pad your budget to account for unforeseen obstacles and potential profit loss during the transition period. Securing financing for your business can also help. Having additional cash flow to purchase equipment, hire new staff, or maintain operations can help give you flexibility and peace of mind, allowing you to focus on growing your business instead of scrambling.
4. Do your due diligence.
Before you buy a business — and potentially inherit piles of debt — do your homework to investigate its financial health. Some businesses look squeaky clean on the surface, but actually, have tons of problems. Consider hiring a business broker or working with an independent valuations firm. They’ll help you determine how much the business is worth and outline any financial hiccups the business has encountered in the past, so you know exactly what you’re getting into.
5. Outline a growth plan.
Perhaps the most important question to ask yourself is: How will you add value to the new company? Contemplate what strategies you’d employ for improving profits, expanding its customer base, and managing employees. It’s also a good idea to figure out whether you’d want to oversee and run your second business similarly to your first one, or adopt a different approach.
Shelton said that just because you own two companies doesn’t mean you have to run them the same way. “There’s some overlap in the fundamental values of both [my businesses] because I’ve been involved, but the culture and the processes are entirely different,” he explained. Despite the differences, Shelton said he believes both his businesses continue to thrive because they serve one another.
“Being embedded in the pest control industry and understanding the challenges small business owners face there has given us a lot of insight into serving our clients at Coalmarch. And being able to gain insight from the agency side on how to stay competitive and what customers are looking for has helped us to continue to grow Triangle across state lines,” he said.
Buying a second business can open doors for you to earn more money and expand your skill-set as an entrepreneur. However, it’s certainly not a decision you should make lightly as it could actually end up harming your newly-formed organization. Follow the steps above and talk to trusted business advisors to determine whether it’s the right move for your business, or whether there are better ways to grow.