Finimpact
Acquisition
Definition
The process of one company acquiring another and becoming its owner
Control
Acquiring company gains control over the company
Legal Structure
​​The acquired company ceases to exist as a separate entity
Purpose
Expanding market share; Entering new markets; Acquiring new technology
Financial Impact
The acquiring company typically pays a premium for the acquired company's ownership
Merger
Definition
The combination of two or more companies
Control
All companies involved share decision-making power
Legal Structure
All companies may continue to exist as separate legal companies
Purpose
Combining resources, skills, or expertise to achieve a larger economic reach
Financial Impact
The terms may involve an exchange of shares, cash, or both

Factors to Consider When Buying a Business

Since buying a business can have a big impact on your life, both financially and professionally, you should consider it carefully. While doing so, keep these factors affecting a business's profit in mind:

Revenue and Profitability

A business’s revenue and profitability should play a major role in your decision of whether or not to buy it. You’ll need to understand how the business makes its income, if the business is profitable after its monthly and yearly expenses, and whether your investment goals can be met by acquiring it.

What You Can Afford 

Being able to afford to buy a business, including the purchase price and the costs to run it, can make or break how successful your investment is. Keep in mind that if you can’t afford to purchase a business with your own funds, you may be able to finance one with the help of business acquisition loans.

Branding and Reputation

Good branding and a strong reputation make a business valuable since it can provide a competitive advantage over other businesses in the same space. You should assess whether or not a business's branding lines up with your vision and if you can leverage it for future growth.

Location

A business's location can have a significant impact on its success. You’ll want to be sure that the business you’re buying is located in a place with little to no competition and that aligns with your target audience. 

An Existing Customer Base

An existing customer base is a good foundation for ongoing revenue and potential growth. Evaluate customer retention rates, costs, and purchasing patterns to see what customers have and haven’t liked about their experience with your business. 

 

Things to Watch Out for When Buying a Business

When you buy a business, be aware of potential pitfalls that could have major effects on your business’s future success. Some pitfalls to look out for include:

Hidden Liabilities and Legal Issues

Before purchasing a business, make sure that any hidden liabilities or legal issues are brought to light during the due diligence process. These could include:

  • Potential lawsuits
  • Undisclosed debts
  • Regulatory compliance issues
  • Environmental concerns

Declining or Unstable Revenues 

To ensure that the business you’re buying isn’t hemorrhaging money, make sure to evaluate the company’s past and present financials with a fine-tooth comb. By identifying patterns of financial instability or underlying problems, you can avoid running into financial problems that risk the viability of your investment. Unless you’re a financial expert, this is best left to financial professionals like business lawyers, accountants, and business brokers. 

Poor Reputation and Customer Reviews

Negative feedback, complaints, and bad customer reviews have a huge impact on a business. If you’re buying one, you’ll want to be sure that your potential new venture is not plagued by a bad reputation. If it is, you’ll need to do significant work to turn it around, which could be costly. 

Lack of Growth Potential

A business’s growth potential is an important factor in the future success of the business. If it has reached a growth plateau, it might be a challenge to create a growth strategy strong enough to increase the value and market standing of the business. 

Cultural and Employee Integration Challenges

New ownership can create challenges when it comes to company culture and employee happiness. To fight against this, you’ll want to buy a company with values, culture, and management style that matches your style. If not, it’s possible that the lack of morale could bring your entire investment into the red. 

Potential Regulatory or Environmental Concerns

If you’re purchasing a business that’s held to strict regulatory or environmental regulations (like a gas station or car wash), you’ll want to ensure that they are being met by the business. Failure to comply with regulations could result in fines, penalties, and even lawsuits. As the new business owner, you’ll assume liability for the shortcomings of the previous owners.

 

Is Buying a Business a Good Idea?

Knowing whether or not buying a specific business is a good idea or not is subjective, and largely depends on your personal finances and credit history. You should consider these pros and cons when deciding for yourself:

Pros:

  • Established operations: Buying a business provides an opportunity to acquire an existing operation with established processes, systems, and customer base.
  • Immediate income potential: A successful business can generate steady income and potentially offer a return on your investment rather quickly. 
  • Brand recognition: Purchasing a business with a recognized brand can provide a head start in the market and attract customers.
  • Growth opportunities: Buying a business may come with growth potential, such as expanding into new markets or introducing new products/services to your already established business.

Cons:

  • Financial risk: Acquiring a business, whether it’s already in operation or not, involves financial risk, as there are no guarantees of success or profitability.
  • Operational challenges: Integrating the acquired business into your operations can present challenges, such as cultural differences and issues with current employees.
  • Hidden issues: Buying a failing business is never a good idea. There may be liabilities, legal issues, or poor reputation associated with the business, requiring additional time, effort, and resources to address.
  • Industry factors out of your control: Economic downturns or changing industry trends can impact the success of the business seemingly overnight. 

 

Final Thoughts

Buying a business isn’t something you enter into lightly. You’ll need to work with professionals (brokers and lawyers) who can walk you through the process and help you determine which buying method works for your needs. Take your time with your decision. After all, it’ll have a huge impact on your finances, one way or another.

FAQs

Why should I buy an existing business instead of starting one from scratch?

Existing businesses already have established operations, brand recognition, and employees. This can save you time and effort when compared to starting a business from the ground up. 

How do I perform due diligence on a business I'm interested in?

Doing due diligence on your own is a huge undertaking. Instead, you’ll want to hire professionals who can help you look out for potential pitfalls. This includes working with a business broker who knows the ins and outs of the industry and can guide you through the process. Additionally, you may want to work with a business attorney who can make sure all your paperwork is in order. 

How can I assess the growth potential of a business?

To figure out if a business has growth potential, you’ll need to evaluate factors like current market trends, customer demand for the product or service, and scalability potential, among others. 

About the Author

Christopher Murray

Christopher Murray

Personal Finance Expert

Christopher Murray is a professional personal finance and sustainability writer and editor who enjoys writing about everything from budgeting and saving to unique investing options like SRI and cryptocurrency.

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