All businesses are not created equal. In fact, even businesses that have similar financial statements, industry trends, and management structures can often times be very different.
Whether buying a business for its income stream, assets or talents, the number one rule is to consider what’s not on financial reports or in legal documents. Although very important, financial and legal due diligence should only part of the review as there are many other important things to understand about a business before buying it.
Why did the business perform the way it did?
After reviewing historical financial reports it’s important to subjectively determine the likelihood of future success. Placing too much confidence in being able to replicate, or even outperform, historical performance is a common detriment of business purchasers. Try to understand why the business performed the way it did. Are their key employees? Was the industry expanding? Was there one major additional client?
How will this business purchase impact your other businesses?
From operations to marketing, management structures to financial liabilities, and taxable to legal perspectives, consider how adding an additional business will impact a portfolio. For these reasons, it is very common that potential purchasers will reach out to IA Business Advisors to help with due diligence. Will additional insurance need to be purchased? Which costs will be reduced by economies of scale? Which will increase?
Is the market for this business’s particular product or service expanding or shrinking?
Industry forecasting is crucial when considering buying a business. Even if the past three years’ financial statements show increasing profits, if the market is projected to be gone in 5-10 years, the IA Business Advisors team might advise to stay away from such transactions. Conversely, just because a market is expanding doesn’t ensure every business in this space is a great investment.
What is the culture now and how will it change going forward?
Personalities, expectations, and experiences are part of what shapes the culture in a business. Culture isn’t static. When a business is purchased, it’s important to identify how the culture may change. Try to identify each key team member’s personality type prior to the purchase. Different personalities are impacted differently when change occurs. Reviewing employees’ and leaderships’ expectations and experiences should also be considered as they may impact performance with new ownership.
When buying a business, the IA Business Advisors team recommends high levels of due diligence. Consultation from accounting and legal professionals should only be the beginning of researching a business prior to buying it. From understanding the reasons for historical performance to how culture will change, there are many aspects of a business to consider before purchasing.