Growing Your Business: 7 Questions to Ask Before You Buy a Company

Purchasing an existing company is a possible strategy for growing your business. But you may want to ask yourself a few questions before making the leap.
October 25, 2016

Buying another company can be a smart shortcut to growing your business. Or it can be a quagmire you quickly regret. Is buying a business the right option to help your business grow? Consider asking yourself these seven questions before you decide.

1. What do I want to achieve by buying another business?

Purchasing a second business can serve many purposes in growing your company.

  • You can buy a company that sells a product or service your current company needs. This can ultimately save you money since you won't have to deal with outside vendors anymore.
  • You can buy a similar business in a different geographic area in order to quickly expand to a new marketplace. For example, if you own a pizza restaurant, you might buy another pizza restaurant in a nearby town and rebrand it.
  • You can buy a complementary business that enables you to expand your product or service offerings. If you own a spa, you might buy a hair or nail salon. If you own an e-commerce website, you might buy a brick-and-mortar retail store.

If you find a business that seems like a natural fit in any of these ways, buying it could be a good option for growing your business.

2. How stable is my existing business?

If you purchase a second business, dealing with the acquisition and integration of the new company into your own can take up most of your time for the foreseeable future.

At the same time, until your new purchase gets up to speed, you may need to rely on the income from your original business to support both operations. Having an existing business that runs like a well-oiled machine can help you get through this transition phase smoothly.

3. Do I have the appropriate management skills and a strong team?

Integrating an existing company requires a particular set of management and leadership skills. After all, an existing company will probably have its own culture, its own ways of doing things and employees who will be understandably wary of change.

Carefully weigh whether purchasing an existing company as a means of growing your business can help save you time, money and headaches compared to other growth options.

If you lack these skills yourself, you may want to have a second-in-command. They can help take charge of integrating the two organizations and execute the transition.

4. How familiar am I with the industry?

Growing your business through acquiring a new business isn't as cut and dry as one would think. Purchasing a business in a different industry—for example, purchasing one of your vendors—can be especially challenging if you aren't familiar with the ins and outs of that industry.

You may have to rely on existing management at the company you're purchasing to stay in place and help manage the transition. You may need to pay them more to stay on board, or else hire outside managers to come in and take charge. Both options can be expensive, so be sure to build these costs into the price of any purchase you are considering.

5. Can I realistically obtain financing for this purchase?

Getting a loan for growing your business can be simpler than getting startup financing, but that still doesn't mean it's easy.

You may want to assess all of your options. Can you finance the purchase out of your own profits? Do you have strong relationships with banks or other lenders? Another option could be seller financing, in which you make payments over time to the seller (somewhat like paying a mortgage) until the purchase is paid off with interest.

6. How quickly will the purchase pay off?

In some cases, buying an existing business to merge with your own can pay off right away. For example, if you purchase one of your vendors, you may see savings quickly.

But in other instances, it can take months or even years for the two companies to mesh. During that time, the second business probably won't be as profitable as it once was, and the first one may suffer as well. Also consider what would happen if the purchase doesn't work out—for example, if all the employees of the new company end up jumping ship and you have to essentially start from scratch. Could you afford that type of loss?

7. Are there other options that would work just as well, or better, for growing your business?

Carefully weigh whether purchasing an existing company as a means of growing your business can help save you time, money and headaches compared to other growth options. Will buying a company be more beneficial than launching a new division, opening a second location from scratch or starting a joint venture with another business?

Consider talking to your accountant, attorney and other advisors to work out the logistics and financials involved in each option you're considering. Sometimes, especially if the opportunity to buy a company arises unexpectedly, a business owner can get caught up in the excitement of the offer and make a rash decision. Try not to rush into purchasing a business. It's better to make the decision with your head—and not just your heart.

Read more articles on business expansion.

Photo: iStock

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