Before you purchase another business.


30th October, 2018

4 things to check before you buy into another business

Before jumping into an investment on a second, or even third business, put your emotions aside and focus on these simple points to make sure you’ll be celebrating and not commiserating your decision in the future.

Once you’ve had a taste of running a business, especially if it’s a successful one, you may start to think you’re ready to take on another project.

Chances are, opportunities to acquire or buy into another business will come across your desk on a regular basis and, of these, some will ‘just feel right’ in terms of what you might be able to bring to the operation.

And while your skills as an operator may prove useful for improving an existing business, you’ll still want to commit to some due diligence to ensure the concept you’re buying into has legs.

The following points represent an absolute bare-bones checklist for anyone considering whether or not to invest in another business.

1. Review your current business

First, it’s crucial to review your current business and work out where it’s heading.

While you might have capital lying around that you are considering using to invest, you need to be certain that you won’t need if for your current business and therefore leave yourself short.

Practically speaking, reinvesting in your current business is probably the simplest and lowest risk use for spare capital. But if you’re sure that things are progressing well and there’s no need for future investment, then it may be the time to invest in something new.

READ: Funding a new business

2. Research the new business’s sector

Once you’ve decided you’re happy to invest and have established how much cash you have available, it’s time to research the sector in which the business operates.

Any experienced entrepreneur will tell you that it’s not a great idea to start or purchase a business in an industry in which you have limited experience.

Both setting up and running a new business requires a lot of time, and if you’re having to learn the ropes from scratch, you’re introducing more risk into the equation.

It’s best to invest in industries with which you are familiar, and to make sure your skills base fits in with your role in the new business.

Look for crossover areas where your skills and knowledge base could have new applications. For example, if you’re good at branding and marketing, a deficiently marketed product-based company could benefit from your strengths.

A good way to think of this is to imagine you are to be employed by the business you’re looking at buying. Do you add value to the company or would you need to be completely re-trained?

If the skills you bring are things that will help increase profit margins, without relying on you for technical skills that you’d have to learn from scratch, that’s a good match.

3. Check availability

Most businesses are incredibly time consuming, and with the likelihood that you’ll still need to spend time managing certain aspects of your first business, you need to be certain you will have adequate time left over for operating a second.

A good idea is to speak with the current business owner and several of their employees (if relevant) to work out how much time is being spent on the business both physically and mentally.

As you will be new to the business, it’s always good to add on an additional 30 percent to any hourly predictions to allow for learning the ropes in the first three to six months.

Once you have a good idea of how much time you will need to spend on the new business, add that to the time you spend on your other businesses, as well as allocation for general administration and any personal commitments you have and you’ll quickly get an idea of whether you’ve underestimated the time involved and left yourself short.

If you’re going to be spread too thin, but it’s financially viable to so, consider hiring a manager to help with at least one of the businesses.

When hiring new staff or giving staff new positions within a company, it’s always best to stay on site for at least three months to provide a solid handover and to evaluate their progress.

If you’re having to constantly run off to your other business and are unable to provide this assessment or are distracted trying to rectify any mistakes due to lack of training, you might find both companies wind up suffering as a result.

4. Speak to an accountant

Once you decide to move ahead with the purchase of your second business, it’s vital to speak to an accountant.

There are many rules, regulations and things to consider when expanding your portfolio and a suitably qualified and experienced business accountant will be able to give you advice on the best way forward.

Owning a second business can be incredibly rewarding and, if done right, can set you on the path for significant financial returns.

By taking your time to really plan your investment and anticipate as many issues as you can, you give yourself the best chance of success in the long term.

Before you know it, your third, fourth and even fifth business investments will become even easier and more profitable.