There are a lot of good reasons for buying a company. You may simply want a bigger business, and buying another enterprise tends to increase an organization's size.
Or maybe you want to acquire a set of skills that your business doesn't yet possess. Perhaps you're looking to get into a new market.
Whatever your reasons, tread carefully. This acquisition may take your company to levels that you've dreamed of—but if things go badly, it could take your business to depths you've only experienced in your nightmares.
You may want to consult a business broker, a merger and acquisitions attorney and a banker—among others—as you consider buying a company. You'll also want to bring in your accounting people, your IT department and human resources—it's all hands on deck.
While I don't have the space to cover every item on an acquisition to-do list, here are some things that are easy to overlook when you're in the midst of the excitement of buying a company.
1. Prepare to pay more insurance when buying a company.
John Espenschied, owner of Insurance Brokers Group in Chesterfield, Missouri, points out that the business you're eyeing might have prior insurance claims that could make buying insurance on it difficult or much more expensive.
“Always ask for a three-year loss history report on all lines of business," Espenschied recommends. This can include:
- general liability,
- building coverage,
- commercial auto,
- directors and officers' liability,
- errors and omissions insurance,
- employment practices' liability insurance and
- workers compensation.
“This will also show if the company has maintained proper coverage in the event of lawsuit for prior incidents. Purchasing a business may put you at risk for prior acts since claims may not be reported for up to one year," Espenschied says.
After all, you aren't just buying a business—you're buying its potential problems.
2. Brace yourself—you could be buying a lot of problems.
David Wiener owns David Wiener and Company LLC, an accounting and consulting practice in New York City —and a division of Eisner Ampner. Weiner has worked with a lot of companies that have been bought and sold. Wiener says that while the following scenarios are uncommon when buying a company, he has seen them happen with acquisitions.
Unwritten promises to employees. Maybe the employees have been promised that they would share in the profits of some sales. It isn't written down, and you're hearing it for the first time, after you've bought the company.
Clients, customers or key vendors who are unhappy. It often happens with key vendors. You bought this company, and they are not pleased.
Minor infractions from the past become a headache for you. Maybe the company you bought owes employees overtime.
More angry clients and customers. Why are they angry? The business you bought owes them refunds and credits. And now, if you want them to not be angry, you owe them refunds and credits.
Go into buying a company knowing this, and other unfavorable scenarios, before you sign on the dotted line.
3. Plan for a lot of human resources work.
It's one thing if you're buying a company that's gone out of business and you're only purchasing a warehouse full of assets. It's another (potentially time-consuming challenge) if you're purchasing a business that's still operating. You'll immediately have new customers and employees.
—Tomer Tagrin, CEO, Yotpo
The data that comes with the employees may be especially vexing to manage. That is, it can be, if you don't have qualified people to help you through it.
“Experienced HR people can work through it quite simply and if they did it once, the second time is like riding a bike," Wiener says.
One of the big issues your business may face when buying a company includes employee benefits, Wiener adds. Your employees have them, and so do the new employees your business is acquiring. And they probably aren't exactly the same.
“During the negotiation and due diligence process, the differences in benefits, contributions by employees, eligibility and pay scales need to be discovered, evaluated and reconciled," Wiener says. (State laws often come into play with how you'll reconcile all of this, he says.)
“Typically, the buyer's benefit plans will be adopted by the seller at a convenient time, often the first day of a plan year."
Payroll is another important issue, though it's generally easily managed if you have a large payroll service handling your employees' paychecks, Wiener says.
“The IRS allows for the buyer to adopt 'successor employer' treatment so that there is no duplication of most payroll taxes and records for benefit plans can be easily maintained," he says. “This would include seniority, PTO records, withholding exemptions and so on. Further, the employee can claim a credit on his or her personal tax return for any excess withholding tax so there is no cost to the employee."
4. Make your new company feel as welcome as possible.
You don't want the new company to feel like it's some little fish, swallowed up by a great whale, or a small country invaded by the bigger one. You're all part of a team now.
You know that, but it's important that they know that, too. That is a big concern for Tomer Tagrin, the New York City-based CEO of Yotpo, a content marketing platform that has over 300 employees. His company recently bought another marketing firm, which has a few dozen staff members.
“Because they're not processes, technologies or products, the biggest wild card in the success of any acquisition will be the people," Tagrin says. “It's not just a matter of incorporating cultures. It's about creating a unified workforce that can deliver on your business goals—either existing or bigger as a result of the acquisition."
In his efforts to make everyone feel like one cohesive unit, his company isn't skimping on onboarding, training and HR and staffing resources up front. Tagrin is making this investment to ensure the new team members are acclimated and integrated into their respective divisions and workflows as quickly as possible.
“You also have to take a top-down approach—as CEO, I have full accountability for the transition and [am] fully apprised throughout the process," Tagrin says. He plans to engage personally with the new and existing employees, “so that I'm sensitive to any hiccups that we encounter on the journey to becoming one company."
That may be the most important internal end goal after buying a company—that eventually everyone feels that they're part of one big team. You want everyone to feel that everyone has brought all of their skills and talents to work together and achieve something big and important.
If you do that, you may find that you aren't buying a company's problems. You've bought their solutions.
Read more articles on business expansion.