It is no secret that starting a brand new business can be very challenging. That is why many instead prefer to purchase an existing business that already has a product with a staff and processes in place. By skipping the most tedious part of the process – launching an entirely new company while figuring out if people actually care about the problem you solve enough to pay for it, your energy can be best spent using your knowledge to help grow the business instead.
If you think purchasing a business might make more sense for you, here are a few key pieces to keep in mind.
Is it a solvable problem?
There are a wide range of reasons why a business can be in a position of seeking acquisition. Those reasons range from just missing a few key components to no longer being relevant in the marketplace. To illustrate, we have put together some of the most common problems that we have seen, lumped in categories based on how difficult they might be to solve:
Solvable:
- Cashflow issues. There is simply not enough liquidity within the business to either fulfill all of the opportunities available, or to invest in doing the things needed for growth.
- Additional capital. Does the organization have enough capital to function effectively? Is there enough money available to invest in the technologies, equipment, marketing, people, or space needed to effectively grow the business
- Team. Is the right team in place to ensure the future success of the organization
- Inadequate planning. Has the organization failed to properly establish a plan that accounts for accurate forecasts of the industry
Harder to Solve:
- Outdated model. The problem that the company is built to solve has changed, or is no longer a problem for the core demographic
- Outdated product. The company has failed to innovate, and as a result, has lost market relevance. Other companies with better technologies, offerings, or platforms have overtaken the company with superior products
- Lack of product-market fit. Either the industry has moved away from the product, or the product never solved a strong enough problem for the target customer
- Bad reputation. Cheap components, lack of product reliability, operational gaps that resulted in poor service for clientele, deceitful practices, or other occurrences that have damaged the trust consumers place in the company
The team matters
There are two frequent scenarios that we see with businesses that are purchased. The first is that the primary product, its positioning in the market, and its community are all strong, however the leadership team is in some way lacking the wisdom or capacity to continue driving the business forward. You see this at times when the world shifts around the company and the company fails to make the right adjustments to maintain a leadership position.
This is often a preferred scenario since the new ownership is able to come in and access the talent already in the organization, listen to the ideas that come up from the employees closest to the problems that need to be solved, and try out new methods for dealing with those tectonic shifts in order to stabilize the company’s market standing. This involves installing or optimizing processes, good management practices, and accountability within the organization.
One of the alternatives is that a failure to properly address customer concerns or competitor inroads has led to an inferior product to what is currently available to your target audience. This requires either research + development, which can be costly, time consuming, and risky if the final product is not accepted, or it can yield a market-leading innovation.
Regardless of what type of issue you end up needing to solve, the team currently at the company, as well as the team you bring with you, will have a very direct impact on the success of your investment.
Part of ensuring an organization is successful after purchase is understanding what you as a purchaser bring to the table. If you have an incredible marketing team, then dealing with a reputation problem is not a major concern for you. Similarly, if you have a strong industrial design team, you will probably not worry about needing to improve workflow automation.
If you or someone you know is thinking about purchasing a business, the team at Hartmann Law Office can help deliver the best outcomes. We regularly help business teams with everything from mergers & acquisitions to restructuring vendor agreements and establishing policies inside the business segments. Our decorated team of attorneys looks forward to sharing insights and making the process as smooth as possible for you and your team.