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Seven key considerations to make before acquiring a business

Acquiring a new business is an exciting challenge for any company. However, when you are acquiring or merging another enterprise, it is essential to make sure you are doing so responsibly.

Mergers and acquisitions (M&As) are a big deal – so, naturally, there is plenty to consider. Before you take on the enterprise, you should comprehensively understand its financial, processes and the strengths or weaknesses it may have. By doing so, you will be able to determine if it’s worth acquiring and, in the event of a merger, whether it’s a fit for your other businesses.

By spending time carefully considering the acquisition before you commit, you will be able to ensure you are making the right moves and that you will experience success once the process is over.

In this blog, we have listed the key considerations you should make before you take on another business as part of your due diligence.

The strengths and weaknesses

One of the first things to consider when looking into buying a new company is whether it’s a good purchase. This will boil down to the strengths and weaknesses of that enterprise.

Identifying strong points and red flags means spending time getting an intrinsic view of the operations, financials, market position and customers of the business.

Examples of strengths could include:

Examples of weaknesses could include:

These are just a limited set of the different strengths and weaknesses any business could have, and the impact they have will vary. While selling points are usually a positive sign when acquiring a business, it does not necessarily mean that any signs of weakness should halt the process. Instead, you must understand what the issues are and what work you would need to do to address them

In some cases, the problems can smoothly be addressed under new leadership and with new goals. In others, it may suggest that a particular enterprise is not a suitable fit for you. It is up to you to decide what you are and aren’t willing to take on. This isn’t a decision that should be rushed, so take time to do your research through workplace observations, data analysis and conversations with the current leaders.

The staff

When acquiring a business, you need to consider the people that work there. When you are taking on another company, you will, of course, have control of the staff and the ability to change the key players there. However, it is unlikely you will want to entirely re-staff the workplace – which would lead to high recruitment costs and time spent preparing a new workforce for operations.

You will therefore want to understand who is working there and how they fit into your vision. This is particularly important for the management team. If there have been managerial issues in the firm historically, it will be your call whether to buy-out managers or to keep them on board. So, you need to identify any problems and understand who you want to acquire alongside the business.

Similarly, it is vital to take stock of the entire workforce and how they work together. In most events, employees can be retrained as the focus of the company progresses and brought on board with new values. However, if there are fundamental issues in the team that have created operational problems or significant skills gaps, this could prove a trickier challenge. It is up to you to determine how such problems could be addressed or whether they could pose a barrier to the acquisition.

In the event of a merger, you will need to combine your team with a new set of workers. This could lead to duplicate roles, so you will need to consider what the new employee structure will be and whether people could be repurposed into other positions.

The culture

If you are planning to merge your company with a new one, you need to make sure the cultures of the two align. Culture boils down to the staff in both locations, the values they have, how they work and the different goals they have been given to work towards.

Merging two companies will always take some settling time, but if the cultures do not match, it can result in HR issues, reduced productivity, lack of direction and miscommunication. In the worst-case scenario, it leads to an unhappy workplace and increased staff turnaround.

To avoid clashing cultures, it is again vital to spend time in the company you will be acquiring to get a sense of how things work there and how that aligns with your existing business. Seek commonalities that indicate the two could be brought together with relatively little fallout.

If you are struggling to picture how the cultures could blend, it could be a sign to look elsewhere for your acquisition.

The financials

You should undertake thorough financial checks on any enterprise you wish to acquire. This will help you to understand any ongoing liabilities you may be taking on, as well as how the company has performed to date – and the profit it may be able to offer you moving forward.

Aim to get a full picture of the business finances, particularly looking at:

By reviewing the finances of the enterprise, you will be able to determine if it is a valuable purchase as well as root out any potential problems that will need to be addressed moving forward.

Nobody wants to acquire a business only to find themselves dealing with complicated and costly legal issues. As a result, part of your due diligence should be careful audits of the enterprise to ensure there are no lurking problems that may arise.

Examples of legal issues are breaches of employment law and other HR problems, escalated customer complaints, violations of contract and any other claims or lawsuits that could be aimed at your business.

Even if the event leading to the claim occurs before you take over, these legacy cases will still be transferred to you once the acquisition is complete. This means you will have to undertake the time, effort and cost associated with handling these issues, as well as take any hits to reputation as a result.

To avoid any nasty surprises, it is therefore important to talk with the current business owners and legal representatives to make sure you are prepared for anything that may reappear later.

Turnaround potential

If you are buying a company that is failing, you will already be aware that there are risks that you need to account for. Even if a business is in a poor state, good management and evolution may help to turn it into a success – which will undoubtedly be your aim.

However, it is crucial to understand what the issues are that you need to turnaround and how easily it can be done. In some scenarios, it may be impossible to get a business back on the right track – such as if there is no demand or customer base. If this is the case, it’s better to know early on rather than waste time and money on something you cannot control, a CVA or pre-pack may be a better solution.

So, spend time weighing up the turnaround potential of the enterprise against the funds and effort it will take to get it to that stage. You should also determine precisely what you will do to address any obstacles and be confident in your ability to do so before you commit.

The timing

Finally, as well as considering the business you are hoping to obtain, you need to consider your own company and whether the time is right. As you may expect, M&A requires a significant amount of planning and work, particularly if there are flaws in the enterprise you are acquiring that need to be addressed. Similarly, it takes substantial funds to both buy the company and undertake the required development on it.

You need to ensure you are in a strong financial position which will facilitate this next step in growth. You will also want to make sure you are getting a sound deal which you can afford.

There are several funding solutions you can utilise to bridge the gap between your finances and the capital required to complete the process. Consider your options or consult a financial advisor to find out what is the best route for you.

You should only commit to the M&A if you are sure you are able to avoid putting pressure onto your existing business.

Get advice

If you are considering a merger or acquisition, it is essential to undertake appropriate due diligence and be sure that it is the right move for you. This means taking stock of the condition and logistics of the enterprise you want to take on, as well as understanding your own financial position.

By doing this, you will increase the chances of the M&A being a success and minimise risk to your own business.

If you need advice ahead of a merger or acquisition, including the financial support and leverage that will help facilitate it, we are here for you.

Our team of experts have experience working with a variety of companies during the M&A process, enabling us to provide you with the guidance you need and connect you with valuable contacts.

Get in touch today.

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