The Benefits of Buying (Rather Than Starting) a Business, and Tips on How to Do It Right

by 13th of October, 2021
The Benefits of Buying (Rather Than Starting) a Business, and Tips on How to Do It Right

We know that a lot of people dream of having a successful business.

But did you know that there’s a hack to becoming a successful business owner, one that’s far less risky, much less stressful, and possibly even more rewarding than doing the hard slog in starting one from scratch?

What’s the secret? Acquisition. Acquisition is a time-tested shortcut to business success.
 


Benefits of Acquiring a Business

Here are some of the major advantages of buying a business (or buying into a business):

  • access to instant revenue 
  • far less stress, expense, and effort compared to building a business from the ground up
  • access to established systems, customers, and supplier bases
  • shorter lead times
  • confirmation of a market for your products or services

On the other hand, if you’re planning to acquire a business to grow your existing one (acquisition for growth), here are additional benefits you can gain:

  • an immediate increase in profit if you are able to reduce or completely remove expenses of the acquired entity
  • lower ongoing combined operating costs due to economies of scale
  • greater number of products or services to be added to your current offerings, which leads to cross-sell and upsell opportunities between old and new products and services, and the ability to offer more comprehensive solutions to your clients
  • access to new markets (or easy access into new markets) and expansion of your geographical reach
  • access to new and typically better technology
  • increase in your workforce (and often, the introduction of existing networks of key contacts), including key talent (This is referred to as ‘acqui-hire’ when it is the sole reason for the acquisition)
  • higher valuation of your existing business, with the larger combined revenue and size triggering a higher profit multiplier 
  • much faster growth than organic growth
  • immediate increase in your revenues
  • greater share of the market

Large multinational corporations are known for using mergers and acquisitions (M&A) to continuously build their empires. In fact, in 2019 alone, the total value of global mergers and acquisitions (M&A) deals was US$3.4 trillion, and in 2020 — in spite of COVID-19 raging across the globe — it amounted to US$2.8 trillion.

Now here’s a secret: small-to-medium enterprises (SMEs) can use this same strategy that the multinationals are notorious for! And here’s why: Statistics from the Australian Bureau of Statistics and the Australian Small Business and Family Enterprise Ombudsman show that the bigger your business is, the more likely it is to survive over four years. So if you’d like your SME to survive and then thrive, you need to consider buying a business (or many!).


 

So... how do you go about it?

 

A Proven System in Business Acquisition


As a commercial lawyer specialising in helping SMEs with business and share sales and acquisitions for more than 2 decades now, I’ve witnessed a number of crucial things that help business buyers get the most success out of their acquisitions.

I dubbed them the 5 Ps of Driving Great Deals. They are:

  1. Preparation
  2. Primary Value
  3. Protection
  4. Process
  5. Purchase Structure

Below is a quick summary of what these 5Ps require and how they can help you get the most out of your business acquisition deal.


 

1. Preparation


The first step in buying a business is preparing for the entire journey. Here are some of the things that you need to have a clear understanding of right from the onset:
 

Goals

Ask yourself what your objectives are for buying a business, and in what timeframe you’d like to achieve them. In addition, you also need to set the metrics you’ll use to determine the success of your acquisition deal.

Deal Team

You’d want to surround yourself with people who’ve ‘walked through the fire’. Many entrepreneurs incorrectly assume that simply having a lawyer, accountant, or business adviser when buying a business is enough. Unfortunately, business M&A is a niche field, and most of those professionals have a generalist rather than specialist knowledge and experience in it.

Process

You need to establish a clear process with your deal team, which includes how you’ll search for your acquisition target, how you’ll assess its value and risks, the timeline for the deal, and so on. This will help you avoid the effects of “deal fever”, where excitement over the deal and anticipation of the end goal overtake rational thinking. Having a due diligence list is crucial.

Acquisition structure and partner agreements

Prepare the structure for your acquisition: share sale, business sale, or asset sale. If you have partners or investors, make sure that relationship is clear in an agreement (e.g., shareholders agreement, unitholders agreement). Having airtight contracts drafted by a veteran M&A lawyer will save you from litigation and other threats to business success down the road.

Current business

Lastly, do a thorough assessment of your current business and its fundamental strengths. Check if your company’s legal infrastructure is strong enough to ward off attacks while you focus on acquisition and integration. An experienced M&A lawyer can help you on this.

 

2. Primary Value


Here, you need to know what forms your target business’s core value, and ensure that it will be transferred to you through the deal. This may be in the customer base, staff, suppliers, distributors, brand, intellectual property, land assets, or others.

The right lawyer can help you ensure the transfer of value in your acquisition deal through commercial preparation, due diligence, and contracts.



 

3. Protection


You must look into:

  • The major risk areas of the business
  • The subset of risk that’s specific to the industry and size of your target company
  • The specific risk in your target (which can be identified and confirmed through due diligence)

The three types of risk that you need to be wary of are value risk, landmine risk, and transaction risk. Lawyers with extensive experience in M&A have multiple strategies in identifying and controlling those risks.

 

4. Process


A lot of things can go wrong along the business sale process, and with people involved, there’s no doubt that there will be challenges that can slow down or even completely halt or end the deal.

Knowing this, our legal firm developed The Rapid Contracting Process™, which boosts efficiency for optimal acquisition outcomes, while minimising unnecessary use of resources. Our firm, Aspect Legal, also uses tons of checklists and templates that we’ve developed over our decades of M&A work, together with our project managers (a unique approach that we adopted to ensure rapid deals) to help us move deals forward as quickly as possible.


For your deal team, we advise that you choose not only people who are knowledgeable and experienced in buying and selling businesses, but also have the right emotional intelligence (EQ). For example, you’ll want to work with lawyers who are not adversarial but, rather, aim for win-win outcomes for everyone.


 

5. Purchase Structure


Lastly, you need the right structure for your purchase price. I recommend focussing on these 3 things: the structure of the purchase (share sale, business sale, or asset sale?), the timing of payment (full purchase price at completion, or staggered in one of many ways?), and how the purchase price is paid (set, or partly contingent on some metric like future performance or the achievement of some milestones?).

Here’s a tip: Consider using options in structuring your deal, which give you the right to buy an asset at a set price at a certain date or upon reaching certain milestone triggers. A call option gives the holder the right to buy, and a put option gives the holder the right to sell. A veteran M&A can help you decide whether options would be good for your deal.



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