Buying an established business can give you a significant head start. You are acquiring customers, revenue, employees and infrastructure that might otherwise take years to build.
But an acquisition can also go wrong if you misunderstand what you’re buying, pay too much or underestimate what happens after completion.
Here are ten common mistakes buyers should watch out for.
1. Falling in love with the deal
The longer you spend on an acquisition, the harder it can become to walk away.
You’ve met the owner, spent money on advisers, built financial models and started imagining yourself running the company.
None of that makes it a good acquisition.
Keep returning to the criteria you set at the beginning. If important information changes, reassess the deal rather than finding reasons to justify continuing.
Sometimes the best acquisition decision is deciding not to complete one.
2. Focusing only on the asking price
A low asking price doesn’t necessarily mean a business is cheap.
Look at what you are receiving for the price.
A £2 million company that generates £600,000 of sustainable EBITDA could be very different from a £2 million company generating £300,000 with declining margins and significant customer concentration.
Price only makes sense in the context of earnings, risk and future potential.
3. Accepting adjusted EBITDA without challenging it
Sellers may present adjustments to reported EBITDA to show what they believe the business can earn under new ownership.
Some adjustments will be entirely reasonable.
Others need more scrutiny.
Go through each adjustment individually and ask whether the cost genuinely disappears after completion.
If you need to replace an owner, hire additional management or introduce costs that aren’t currently reflected in the accounts, include those too.
Base your valuation on the earnings you believe the business can actually maintain.
4. Underestimating owner dependence
A company may have 50 employees and still depend heavily on one person.
Understand exactly what the owner does.
If they generate most new business, manage the largest customers, approve every major decision and hold important operational knowledge, their departure creates risk.
Work out how those responsibilities will transfer and whether you need the seller to remain involved for a period after completion.
5. Ignoring customer concentration
A business with a few large customers can produce excellent financial results.
It can also change very quickly if one of them leaves.
Look at revenue by customer and understand the history and strength of the largest relationships.
If one customer represents a significant percentage of revenue, consider what losing them would do to EBITDA, cash flow and your ability to service acquisition debt.
6. Paying for growth you still have to create
A seller may tell you the company could expand internationally, launch several new products or double its customer base.
They may be right.
But if you need to provide the capital, recruit the team and execute the strategy, be careful about paying today for value you still have to create yourself.
Distinguish between growth that is already visible and growth that remains an opportunity.
7. Using too much debt
Debt can make an acquisition possible without providing the entire purchase price yourself.
But the business needs to repay it.
Model what happens if trading is weaker than expected.
Could the company still comfortably make its repayments if EBITDA fell by 10% or 20%?
Could it fund an unexpected capital requirement?
Could it cope with losing an important customer?
Leaving some financial headroom can make the difference between a temporary problem and a serious one.
8. Treating due diligence as a formality
Due diligence isn’t something you do simply because your lender or lawyer requires it.
Use the process to test your understanding of the business.
Check the financial performance, customers, contracts, employees, tax position, legal obligations and operational risks.
If something doesn’t make sense, keep asking questions until it does.
The purpose isn’t to prove that your original decision was correct. It is to decide whether you should still make the acquisition now that you know more.
9. Forgetting about life after completion
It is easy to spend so much time getting the transaction completed that you give too little attention to what happens the following morning.
Who will speak to employees?
What will customers be told?
What responsibilities need to transfer from the seller?
Which suppliers need to be contacted?
What are your priorities for the first 100 days?
Start planning for ownership before you own the business.
A good transaction can still become a difficult acquisition if the transition is poorly managed.
10. Trying to do everything yourself
Buying a business involves financial, commercial, legal and tax considerations.
You don’t need an enormous advisory team around every transaction, but trying to save money by avoiding appropriate professional advice can become expensive if something important is missed.
Use advisers where they genuinely add value.
Your accountant, lawyer, tax adviser, lender and other specialists should help you understand the transaction, not simply process paperwork.
You still need to make the final decisions, but you should be making them with the right information.
Stay disciplined
Good acquisitions rarely come from finding a business and then trying to make the numbers justify buying it.
Start with clear criteria.
Understand the business.
Challenge the valuation.
Investigate the risks.
Make sure the funding works.
And be prepared to walk away if the opportunity no longer makes sense.
There will always be another business to buy.
The objective is not to complete a transaction. It is to acquire a business that you will still be pleased you bought several years later.
Find your next acquisition on The Brokerage
The Brokerage connects buyers with business owners and brokers bringing businesses to market. Create your buyer profile to define your acquisition criteria and discover relevant opportunities. You can also use The Brokerage’s Professional Network Directory to find legal, financial, tax and transaction specialists to support you through the acquisition process.