Business Buying Process: Where to begin
Episode Summary – The Business Buying Process: Where to begin?
The following is an edited extract of our conversation with Pete Seligman from episode 16.
This follows a related Episode 13 The reasons to buy a business and not start one.
Begin the business buying process with some self-reflection
The process of figuring out where to start can always be a challenge. I think that where you need to start is with yourself, frankly.
Sounds a bit cliche, but really understanding who you are and what you want is going to be an important input to your decision-making process.
Do you have the Personality and Mindset of an Entrepreneur or Business Owner?
And if you start looking for or acquiring a business that isn’t based on:
- who you are
- what your interests are
- where your strengths lie
- what your aspirations are,
then you’ll come unstuck pretty quickly.
An important question is “why am I doing this”?
If you don’t spend time answering this question, issues can arise.
The most common is that you end up in a business that isn’t aligned with where your interests or passions lie. This can make it very difficult to make it through the hard times, which always exist.
There’s always going to be hard work involved. And if you don’t have that passion, aspiration or interest, then those difficult periods will be magnified.
It may mean that you’re less aligned with either the people in the business or the co-investors that you get involved with.
So I think really understanding yourself is paramount. To me that comes down to three things I mentioned earlier. Knowing your strengths. What are your interests? And, what’s your aspiration?
Define your mandate for buying a business
So ultimately, this comes down to, starting with yourself and an understanding your motivation.
If an institutional investor, private equity firm or a fund manager wants to go and raise the money to buy a business, they will work out the types of businesses they want to target. They typically call that a mandate.
So if we use that word mandate, and say, Well, if you’re going to go out and buy a business and invest your own money in doing that, you need to define your mandate.
And so what is a mandate?
Well, it’s a clear description of the kind of business that you want to buy. A good analogy, is the process of buying a holiday house. In some respects, it’s not too different from the early steps in the business buying process.
If you’re in a position where you’ve got funds available to invest in buying a business, you probably have the type of funds available that you might go and buy a house at the beach or a house in the mountains or a house on a property in the country.
Start the buying process
Before you start the buying process, you need to identify some basic characteristics.
- Where do I want it to be?
- How much money do I have to spend?
- What kind of characteristics do I want the property to have?
- Do I need it to be close to certain services?
- Will it need to have a certain number of bedrooms?
- Does it need a lot of work to fix it?
- Or one that’s only just recently built?
So all of those things help you to filter your search to find the property you’re looking to buy. It’s not really very different to when you go to look for a business to buy.
You need to think about all those characteristics that are going to suit your strengths, interests and aspirations. Including the market, the size of the business, to the positioning and style of business.
Is it people heavy or capital heavy, or people and capital-light?
All of those things go to how do you define your mandate
Consider a business partner when buying a business
In some respects it’s no different to the property purchase. You’ll have a certain amount of money yourself. And then you’ll probably go and look to a bank or some other lender to top that up to increase the amount of leverage and effectively increase your capacity.
It’s similar when buying a business. If you’ve got a certain amount of money and you think you might need a bit more, one way to increase that capacity is to find someone to go into business with you.
You are clearly adding some more money to the pot by inviting someone else into the mix. But actually just as, if not more importantly, it’s about the comparative strengths that those people can bring.
So I would actually also encourage people, when they think about their own strengths and interests, to think about where the gaps might be. Think about whether or not there are people in their network who might be able to fill those gaps.
Because having a business partner, particularly if you’re going into your first investment, is hugely valuable.
Someone who, side by side, can be taking the risk on with you. And effectively they are sharing the burden of, not only the hard work, but also the risk.
Do consider a business partner and try to find someone that can be a good fit for you in terms of comparative strength.
There can be a downside
What can happen is that, unless you clearly define what you both want, there can be a tendency to drift apart. That’s clearly where friction can appear.
Alignment of mission is the greatest driver of value in any business, at any stage of its life-cycle. And if you can get that right, you’ll create the most value.
When it goes wrong, it can go really wrong.
It’s one of those things that you not only need to assess before you start, but you need to think of a rhythm in which you can continue to reassess it. And make sure that you continue to stay aligned, through the life cycle of that investment.
And then how you deal with it when the alignment becomes wider. How do you actually deal with it and bring it back?
Agreeing on those things upfront is really important. Typically, when people do find business partners, they may be people that are already in their network. Perhaps people that the business owner is quite close to. So there’s a level of trust there.
But here’s where you don’t want to make a mistake. Even when you know the potential partner well, you still need a process whereby you can deal with any issues.
Because that’s where you end up with real problems. So don’t mistake a good relationship for the lack of a need to properly articulate the business relationship as well. I think clearly articulating the business relationship is critical, regardless of the existing relationship that’s there.
If you can’t have a tricky conversation before you even start climbing the mountain, imagine when you’re halfway.
The search process for finding a business to buy
The thing that you’ll get into pretty quickly after you cross those first bridges will be the search process.
The process will be informed by those initial questions you are asking around strengths and interests and aspirations. So you generally tend towards those areas in which you are most knowledgeable.
And those will probably be the business areas that you end up focusing on in defining that mandate.
But there is no doubt that once you start the search, you will continue learning. And I think that the search process can be hugely informative, and educational.
When starting the search, people need to be aware that it will take time.
To find a business might take you three to six months to then actually go through the process of acquiring that business might take you another three to six months. This is not a short process.
There is a significant amount of time involved. The first business that we bought, we would have easily looked at:
- high-level summaries for 150 to 200 firms that fitted the mandate,
- detailed information documents for at least 50 of those
- met with between 10 and 20 of the owners,
- formal offer on five,
- we bought one.
Or, there is the wrong way…
This is not a process where you flick around on the internet for a couple of days and identify 10 businesses go and meet with a couple and buy one.
Although, unfortunately, some people do it that way.
If you end up buying a business using that shortened process, you’ll either end up being very lucky or very unlucky.
And you won’t know which one of those it will be for a period of time.
How much knowledge does someone need to begin buying a business?
It’s worthwhile understanding that that the search process is a journey in itself. That’s before you even get to the negotiation process or taking ownership of a business.
One of the benefits of the journey is the knowledge that you gain along the way.
So don’t discount the search as just a means to an end. The search itself is hugely informative.
The searches that we’ve done for the businesses that we’ve bought taught us much about the marketplace. About the competitors, the supply chain and the customers.
Plus, the day after you buy the business, you will learn a lot more than that. The learning never stops.
Key Points for where to begin buying a business
- Understand what aligns with you, your interests and knowledge.
- What is your motivation?
- Define your mandate to describe what business you want.
- Consider a business partner to share the risk and workload.
- See the search process ars a learning opportunity.
- Be aware of transferable skills that you can bring and where your gaps might lie.
In the next buying a business episode we cover how to choose a business?
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