Do sellers and investors understand the true implications of their cations?
The current business climate has seen a resurgence of the acquisition culture, the modern approach is not to, found, a business, but to buy the elements you need, and form a group or holding company.
Investors see this as the quickest, and most simple way, to achieve the returns they require.
The formula is simple, buy a business that is available in a market that has potential. Once acquired, work out what can be done to improve the operational efficiencies, to in return make more profit. Moving on, you then buy another business of the same type, allowing you either a geographical distribution, volume production or other advantage.
Other tools used by investors include, the Leverage Buyout, often seen as a guaranteed formula for success!
Let’s move to the bigger picture, what may at first seem to be a simple equation
- Having money equals success, if you can buy a business, you can make a ton more money
- This can, and often does, backfire massively. Leaving the investor with nothing, other than a big bag of failure.
- The contents of the bag of failure, are often not less money than you started with, but in fact, a minus figure or simply put, debt, that needs to be repaid.
- Putting aside, the fact that corporate structures allow business to be liquidated, and the creditors to be left out of pocket.
- In the case of a leverage buyout nothing was actually invested by the purchaser, so they lose nothing.
We are now left, with important questions.
- Should we ever, enter a situation, where we buy a business and the livelihoods of its staff, with the intention to fail, or employing a worst-case scenario, state of mind?
- Should we sell a business, that includes our good reputation, and commitment to our staff, to someone who doesn’t know what they are doing?
The answer of course is no.
We have to consider, several components, of the situation described above.
- The investors, and their will to succeed.
- The sellers, and their need to sell.
- The operational aspects, of the investors group, or holding company.
- The need to satisfy, shareholders and lenders expectations, and, the required knowledge, and understanding, to know beyond doubt, that what we are buying is, what we are being sold.
The essential component must be, the need to understand “and control” what is being bought and sold.
When referring to this, situation, we’re not discussing something, akin to Google, buying Microsoft, or DHL, buying UPS, we refer to the normal world, of SME business, where processes, and structures, are not highly defined. The type of business where knowledge is not recorded but taken for granted.
Entrepreneurial spirit is a fantastic driving force, however, a small amount of entrepreneurial success, in an individual, can bring about misconceptions. Often leading them to believe, they are in fact, the greatest business mind, that ever lived. Leading them to close their ears, and minds.
Experience tells that in most cases, success is linked to being in the right place, at the right time, or put another way, luck, being lucky is responsible for success, as equally to planning and control. However, luck is not something we can control, as anyone who has bought a lottery ticket can tell you.
When we have removed luck, from the equation, we are left with reality, and reality is, preparation and planning, are the key factors, in driving success.
Starting with the business that is for sale, we must ask questions.
- Why is the business for sale?
- Are there true factors driving the sale, being hidden from us?
- Have all the business processes been defined?
- Have those processes been recorded and tested for robustness?
- Do we have trained staff, whereby the required knowledge has been defined and shared?
- When thing shave gone wrong in the past, has they addressed appropriately, or do we have potential future liabilities?
- Are going to be able, to retain the knowledge in the business, if staff members leave?
We now need to question our abilities and capabilities.
- Do we really know, what we are going to achieve with this business?
- How certain is the future, for the sector we are placing ourselves in?
- Are we being sold the dream or the reality?
- Is our perception of the resource need to achieve our goal accurate?
- If the management were to leave the business, can we continue as planned?
Now we get to the root od the problem, how does all this happen, how can all this be facilitated?
Obviously, you will need a system that allows you control and have visibility of all these issues simultaneously.