Buy your way into entrepreneurship

Posted on January 23, 2017 by ATB Chartered Accountants

Acquisition entrepreneurship is an increasingly popular career path individuals are choosing, as opposed to the traditional starting your own business, and climbing the career ladder towards partnership. It involves buying and running an existing business.

Determining if acquisition entrepreneurship is right for you is reliant on your own personal preferences and temperament, however, people report that it is personally, professionally and financially rewarding.

One of the biggest benefits of acquisition entrepreneurship is instant impact. The acquisition of the business means that you don’t need to spend countless hours working on a business plan. You are immediately in charge of an operating business. As well as this, acquired entrepreneurship allows individuals a more flexible lifestyle than what may be possible as an individual with a start up, or trying to work their way up a company ladder. You are becoming your own boss of a functioning, relatively stable business.

While these benefits seem appealing to many people, there are a number of challenges associated with buying your way into acquisition. These challenges make it crucial for you to first ensure that you are suited to such a career move, and proceed systematically through the process of searching, negotiating and transitioning into a business. The Harvard Business Review have developed a roadmap in light of these challenges in order to minimize your risks.

REFLECTION

In order to succeed in an acquired entrepreneurship, you need to have sound management skills. This includes finance, leadership and decision-making, among others. Since you are going to be immediately in charge of an existing business’ operations, you need to exhibit confidence in order to maintain the support of all stakeholders in the business such as your staff, suppliers and customers. As well as this, you will need to be persistent through periods of setbacks within the business, and enthusiastic in learning everything you can about the business and industry it is a part of. Finally, you need to reflect on whether or not the reward outweighs the risk of owning your own small business.

THE SEARCH

Even though entrepreneurs tend to worry about making mistakes after they acquire a business, many individuals find that their emotions and desire for convenience leads them to making mistakes. These might include buying the wrong business for them, and paying too much for said business. In order to avoid these issues, it has been recommended to search from between 6 months and 2 years. While this may seem like an excessive period of time, this time period is necessary in order to attract investors, identify prospective businesses, negotiate and eventually find a seller within your budget. After you have found the business you intend on requiring, formalities such as the due diligence can take several months.

Identifying and approaching potential investors is also helpful in the acquiring process as many can act as advisors throughout the negotiation process. Alternatively, you can self-finance. In doing this however, you may need to limit the number of prospects you consider.

The search process begins with finding and sorting through prospective businesses. You should ideally be looking at a business with relatively stable businesses, avoiding those which are rapidly growing start-ups that carry high risk. In doing so, you are able to earn a return on investment, while still having room to add value.

Given the large numbers of prospects you’ll come across, there are five main questions you should ask:

  1. Is it profitable?
  2. Is it an established business?
  3. Are the revenues and cash flows in an ideal range?
  4. Do you have the skills required to manage it?
  5. Does it suit your lifestyle?
NEGOTIATING A DEAL

The first step in negotiating with your prospect after meeting with the business owner is to draw up a preliminary due diligence. This is a period of learning before preparing to make an offer. The preliminary due diligence allows you to confirm or dispute any claims the seller has made about their business, as well as verify any other information that made the business appealing to you in the first place. The due diligence also provides you with access to the business’ historical data. This is useful in projecting future earnings and expenses, and allow you to determine, with accuracy, the business’ worth.

During the negotiation period is also when you should be convincing the seller that you are the right buyer. This is particularly important when you are competing with other buyers. If your offer is accepted, a period of confirmatory due diligence begins, and at this point the business’ records will be fully accessible. At this point in time, it would be beneficial to bring in an accountant and lawyer to offer advice and check for any warning signs before proceeding any further.

TRANSITIONING INTO LEADERSHIP

Once the sale has been finalized, there are four main things you should focus on: meeting your new colleagues, meeting with the external stakeholders, communicating your transition plan to all stakeholders, and taking control of your cash flow. Meeting with external stakeholders such as suppliers and your biggest customers will also give an opportunity to gain useful ideas and insights in how to improve your new business’ offerings. Transparency with all stakeholders is key throughout the leadership transition process. When everyone is on the same page, the business will continue to operate smoothly and employees can be put at ease.

While it is inevitable you will experience some difficulties in acquiring a business, if you follow the process carefully, and manage the situation well, you will be able to focus on growing your business.