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First NLC starts correspondent lending division

Jun 27, 2005

Six critical issues about buying a businessDonald Hadleybusiness acquisition, management, risk, factors Buying a business can be a much more dangerous proposition than selling a business. Rather than eliminating or reducing risk, a decision is being made to take substantially more risk in an environment with employees and processes that are more familiar to the seller. Even if you know the industry, each business has its own nuances and hidden elements that make running a business more of an art than a science. 1.What is your purpose in buying the business? *Is it an opportunity? If it is, be careful, because it can be a very tempting deal. The selling owner may be older and/or burned out and want to exit the business. If so, have they paid much attention to the business over the last five years, or have they been ignoring some internal issues? Or is it a sudden health problem that prevents the seller from continuing? *Is a business attempting to expand and simply needs capital? If so, some businesses constantly need capital since there may not be financial controls in place to limit spending. If this is the case, are you going to put controls or limits in place? Will the selling owner be the one who continues to manage the cash flow? *Is it to complement your existing business? It is interesting to integrate your business with another to increase your profits; however, many businesses that look similar are not. If they are similar, can the employees in each of the businesses work together effectively? *Are you diversifying away from your existing business? Diversification sure sounds smart, but when it involves actively managed, closely held businesses, the financial resources and skill sets needed to balance a couple of businesses are completely different. (See number five below and run your own lifeboat drill.) *Are you trying to help someone? Rarely has this initiative ever seemed to work out. To simply help out may really mean that you are chairing and financing a charitable event. If you really want to help, find a good business reason to go through with the deal or help them identify some other options that may help them, but will not commit you to more complication and potential liability. 2. People are more important than the product. Regardless of what product or service you are selling today, odds are that in the next 10 years, it will be dramatically different. The product may be different or there may be a new method to deliver it to your customer. Or it may be that the operational aspects of your business change (look at the Internet and computers). Your suppliers and customers may be different. Your needs and wants may be different. Or it may be that all of the above will change. Change is inevitable and occurs faster today than ever before. For that reason, even if the market for the service or product of the business you are buying is strong, are there people working for the business that can handle the crisis and opportunity that will be occurring in the future? Are they developing themselves personally and learning? Do they lead stable and productive lives outside of the workplace? Will they be loyal to the business and you, or will they want to leave when the old owner leaves? Do you have backup employees for each position? Are they cross-trained? How well do they get along with one another? 3. Owning a business is like adopting a child. Owning a business is like having children. While someone else may have given birth to the child, your purchase of the business is like adopting a teenager. Similar to the hormonal changes of a teenager, a business being purchased will create ripples of concern with the new businesses suppliers, customers and employees as well as with those involved with your existing business. Do you want to become a parent again? What will your exit strategy be if you cannot handle the new business? Is there a way to separate the desirable parts of the business from the parts that are not as valuable to you? What training can be done to fit the business into the parameters that need to be met? 4.Sometimes, it is more about ego. Those of us who run profitable existing businesses have a sense that we can run any business, or at the very least, attract and retain others who can run the business effectively. We have had clients branch out from one business into another and find that every business is much more of an art than a science. The fortunate entrepreneurs have simply had the time needed to get the business running the way they wanted it to run. The not-so-fortunate entrepreneurs ended up presiding over a combat zone that affected their standard of living and relationships with their other businesses, family and close friends. Starting and building a business requires a different set of skills than maintaining a business. Expanding and growing a business requires a different set of skills. Balancing and managing different businesses and/or divisions is yet a separate set of skills. Have you had any training or mentoring for balancing and managing different businesses and/or divisions? 5. The lifeboat drill If you have ever been on a cruise, usually on the first day of the trip, after everyone has had several "bon voyage" drinks, the captain announces on loudspeaker for everyone to take their life jacket to their assigned boat. The purpose of this exercise is to prepare for a crisis before it has happened. The captain becomes more confident (along with the passengers) that everyone knows where to go in case of an emergency. The same sort of drill should be applied to your business ventures. What happens if one business has problems? Will you use profits from one business to fund another? Are you willing to risk one business for another business' survival? What will your bankers do? What if both businesses run into problems? What is the worst cash flow imaginable? At what point would you walk away from the new business? (If you would like a list of questions that are good to ask for running your own lifeboat drill, e-mail me at [email protected].) 6. Profits are made from the deals you walk away from. While running several businesses can be very "sexy," I have heard many of the wise, experienced and wealthy war veterans of business recommend walking away from any deal that does not have a good feel to it. If there is one problem, it can be handled. But with two businesses, there could be a series of problems that can make life more than a difficulty and turn success into impossibility. If you feel doubtful, even if you cannot pin down why, it is usually best to walk away from the deal. Donald Hadley is president and financial planner of FFG Companies Inc. He may be reached at (919) 261-9850 or e-mail [email protected].
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