First NLC starts correspondent lending division
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First NLC starts correspondent lending division

June 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 dhadley@ffgusa.com.)
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
dhadley@ffgusa.com.

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