Buying an Existing Business

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You could buy and then improve an existing business. This can be done through a management buy out (MBO) from inside, or buy in (MBI) from outside. Or you can just buy a business from the market. Let us look at MBO/MBIs first. For an MBO/MBI an entrepreneur needs the backing of a financial institution to put them and their team in charge. They see the main asset of any company to be the team who manages it. Even in this technological age it is still people who make the changes. A new team is often successful in a failing business. Often the management has, by definition, bought into the old ways of doing things, which is where their knowledge and expertise lies.

A new team has not bought in to the old ways and sees things from a totally fresh perspective. This seeing things in a different way is right at the heart of entrepreneurial skills. Turnarounds are all about using resources in more opportunistic ways. Often entrepreneurs go in with advantages over the old management. If they are buying in through a financial institution, a strong backer will give them all sorts of advantages. That backing alone will give the team the ability to negotiate far better terms with suppliers. Debts on the company are now far more secure and, with backing, growth is a real possibility. Therefore, both price, in the anticipation of bigger orders in the future, and terms of credit can be made on more favourable terms. There are plenty of examples of companies being turned around b doing just that.

A close friend of mine, Alan Lowden, on the back of some outstanding early successes developed a reputation for being able to turn around established businesses in a very short period of time. This reputation led to him being put into several enterprises by venture capitalists. He received an equity deal without any personal investment. Ask yourself if someone gave you serious financial backing what you could start up or substantially improve. If you have convincing skills on your CV, there will be people who will back you. You are a formula for making money, just waiting for the right opportunity. All you need is expertise and a track record of success usually in a specific sector, with a determination to get a backer.

At one point I was brought in as MD to a recruitment company with seven branches. My task was to take it from a significant loss-making situation into profit within one year. I achieved this and then proposed an MBO to the owners. I had a backer and a team in place. If this sort of proposal might appeal to you the British Venture Capital Association (BVCA) will supply you; with a handbook of members who list their specialist in this type of deal. A going concern with a proven and committed management team in place will be attractive. The extra ingredient they will be looking for is to be convinced that you can substantially grow the enterprise. Incidentally you can buy a company by factoring the company’s outstanding invoices – a simple way to raise all the money you need.

If you have expertise in an industry and a loyal team, then an MBI could be a viable option for you. You simply find a financial backer to buy a company and put your team in to manage it. Often venture capitalists will already have stakes in companies that are not going to plan and putting a fresh management team is very attractive to them. You have to convince them that you can make substantial improvement where the current team is failing. You may even spot one or more companies in your industry that you can form into a group under your management.

If you have a pedigree in an industry and a convincing strategy, you have an opportunity to avoid the high risks of a start up and concentrate on an organization that is already up and running. Many businesses have had dramatic turnarounds when a new management was put in place. Individuals like Lee Iacoca (Chrysler) and John Harvey Jones (ICI) have both made dramatic changes to the companies they led when they were given the helm. This reinforces my view and certainly the one taken by venture capitalists that any company’s greatest asset is its management team.

Alternatively, you can just buy a small company from the market. There are business brokers such as the Avondale Group that are brokers for businesses and will offer a range of sectors and prices, and advise you every step of the way. Buying a business has many advantages. First, it is far easier to raise finance because there is a track record and profits to offer. Second, it can be bought with the help of owner financing or by factoring the company’s own invoices. Often you can pick a business where you immediately add value through your contacts, expertise or other assets. Getting a company to increase profits is a hundred times easier than getting a start up to break even. As valuations of small businesses are based on a multiple of profits, you can literally increase market value every day. Risks are clearly far less when acquiring an already profitable business.

About Author

Anthony Whitfield is a business consultant and a part time blogger who loves to write on business and finance topics, He admires William Lauder, and his business skills a lot.