GREAT IDEAS FOR ENTREPRENEURS FROM THE THOUGHT LEADERS AT CASEY NEILON
SHOULD I BUY A BUSINESS OR INVEST IN MY CURRENT ONE?
WHAT MAKES SENSE IN TODAY’S GROWTH ECONOMY?
Recently I’ve been working with growth-oriented entrepreneurs who are trying to make an important decision. They are grappling with the need to grow, but are unsure whether to buy a business or to invest in their current business. This decision could be make-or-break for them so it’s important to get it right.
As you probably know, many acquisitions do not work out. There are all sorts of reasons for this including cultural differences between the two companies. But it is equally true that almost nothing will grow a company faster than an acquisition. In a matter of weeks, an acquisition can double revenues or more, add great new customers, increase staffing to handle more work, provide entry into new markets and expand overall capacity. However, although acquisitions may increase top line growth, they may not have the same impact on net income.
The business climate today makes some entrepreneurs feel that if they are not growing by double digits every year, they are missing out on once-in-a-lifetime opportunities. You might feel the same way. So should you buy or should you build? Here are my perspectives.
Just To Be Clear
I want to make sure I’m clear in describing what I mean by buying another business. Most of the advice I’ll offer below is about buying another business in the same industry, possibly even the same geography, as your current business. This could mean buying a competitor.
This advice is not about buying another business in a different industry. That is an entirely different discussion. There are many good reasons to buy a business in a different industry including revenue diversification, synergies with your current business and other factors. But I really don’t have space in this article to discuss the pros and cons of buying a business in a different industry. My colleague Nicola Neilon has written an article with some good ideas about that topic.
The advice I outline below is for entrepreneurs who are considering buying another business that’s probably very similar to their current business. I’ll explore more below about why entrepreneurs choose to do so. But the primary motivation seems to be fast growth and expansion. In most situations where I’ve provided counsel, the client is considering buying a business that is the same size or slightly smaller than their current operations.
A Case Study
A client reached out to me recently to discuss this exact question: should I build or buy? While our dialogue was initially centered around the tax implications of a potential acquisition, I felt it was important to understand why this entrepreneur was considering an acquisition in the first place.
So I asked – why do you want to buy this business? The answers I heard led me to ask still more questions. As it turned out, this entrepreneur had far more options for achieving their goals, without buying a new business, than they had previously considered. Investments in their current business might achieve the same goals but with lower risk.
I often find this. When a client trusts us enough to explore with them not only what they want to achieve but, more importantly, why they want to achieve it, doors open up. We get to expand the conversation and explore more options, some of which can be a much better fit for the client. The benefits of this type of exploration are well documented in an important business book from Simon Sinek called Start With Why.
Before you buy a new business, get clarity about why you want to do so.
My Five Best Pieces Of Advice For Entrepreneurs Considering The Buy-Versus-Build Question
After reflecting on the many situations where I’ve advised entrepreneurs struggling with the build or buy question, I’ve come up with five guiding principles that I believe will help you:
- Get clarity about why you want to buy.
- Understand the cost implications of both options.
- Be clear about how this decision will impact your long-term plan.
- Analyze your risk factors very carefully.
- Don’t do this alone because decisions of this magnitude are best made with solid counsel and the wisdom of experience.
Let’s explore these together.
Get Clarity About Why You Want To Buy
I believe it’s important to be 100% clear within yourself about why you want to buy a business. Most entrepreneurs will have a multitude of drivers shaping their motives. Generally, I separate these into two categories:
- Business reasons to buy
- Personal reasons to buy
The business reasons to buy can be multi-faceted. Here are some things I typically hear:
- It accelerates our growth and cuts 5 to 10 years off the curve we would go through if we grew the business organically.
- There are synergies between the two companies and the business being acquired brings some new skills to the table. This will help us serve clients better and differentiate from the competition.
- It can be very hard to acquire great new employees. The successful business we’re considering already has them.
- A larger revenue base gives us access to financing options that a business of our size simply cannot get today.
The personal reasons to buy are usually a bit more subtle and nuanced but can be very strong drivers in the decision. They can even outweigh the business reasons. I often hear things like:
- “An acquisition will help me feel like we’re moving in the right direction and picking up steam again.”
- “We haven’t achieved our full potential. We want increased market share and an acquisition helps us feel like that’s possible.”
- “In our industry ‘bigger is better’ and being bigger will open up all sorts of doors now and in the future. It will also help me with an exit plan that will fund my retirement.”
To gain clarity on your “why” I believe that you need to spend some time analyzing your business and personal motives and create a list of outcomes that you want to see from the acquisition. I also recommend that you rank these outcomes on a scale of 1 to 10 where 1 = not important and 10 = it absolutely must happen.
This approach will help you separate what you’d like to see happen from what you believe absolutely must happen. I find that when we rank outcomes this way, we get much closer to the core motives that are pushing an entrepreneur to take on this much risk. Let’s be clear. An acquisition is a big risk.
As soon as you have clarity about why you really want to buy, then I recommend that you ask yourself if an acquisition is truly the only way to achieve those goals. We often find that this exercise produces clarity and peace of mind for entrepreneurs on two levels.
First, it helps them see whether or not an acquisition is truly necessary. This sense of necessity can be very helpful later when things get tough. Clarity often produces resolve. Resolve is a crucial state-of-mind for entrepreneurs. When you have resolve, you move ahead expeditiously without second-guessing yourself. Even if things don’t work out, you can still have no regrets later.
Second, it allows entrepreneurs to consider options that they might not have been thinking about. An acquisition can often feel like a one-way street where all of the traffic is moving toward the purchase. Smart entrepreneurs know that they need to take a close look at the downside as well as the upside. This exercise helps balance out the energy so it’s not all moving toward a purchase.
Understand The Cost Implications Of Both Options
One of the biggest mistakes an entrepreneur can make in these crucial decisions is not fully understanding the cost implications of the various options. While there is no certainty of outcomes from any option, there is a great deal you can do to project actual expenses and the potential increase to the bottom line.
This is why I recommend that you do the hard work, or hire someone to do the hard work, of due diligence and financial modeling. While due diligence certainly requires an up-front investment, it could save you a tremendous amount down the road. Here are the core areas where I recommend that you understand your cost structures:
- Get clarity about how much each option costs:
- Can you grow your current business without expanding your staff or your facilities?
- How will you generate the business leads to grow your current business?
- Can you incorporate the acquired business into your current facilities, or will there be additional cost of overhead such as staff, office space, insurance, operations, etc.? This is a cost-structure that acquirers often underestimate.
- Are there economies of scale that will allow you to reduce the overall costs of the combined businesses?
- Understand how the owners of the acquired business will be paid out and if they will be needed in the short term to transition clients.
- Understand your need for financing in either option and how this can impact your personal finances and the operating costs of your existing business. Make sure your financial models are based on actual hard-trend data, not just projections.
- Understand your tax implication from both options.
This exercise should result in two financial models, one for building your current business and one for buying the new business. While there are no guarantees that either model will ultimately be realized, this approach is the most informed way for entrepreneurs to make decisions that I know about today. More information is better.
It is also very important that someone besides you is working on the financial models. I recommend that you hire a financial expert to do this modeling because they have experience and can help you see things you might otherwise miss. The more accurate your financial models, the more accurate your decision will be.
Be Clear About How This Decision Impacts Your Long-Term Plan
Some entrepreneurs I work with never plan to retire. They intend to work until they pass. Other entrepreneurs have a definite exit strategy. Depending on the type of business they are in, their exit will usually be one of these:
- Transferring the business to a loved one.
- Transferring the equity in the business to other stakeholders who will take over, often trusted employees or partners.
- Selling the business to a third party.
As it relates to the build or buy conundrum, here are some questions to ask yourself:
- If I buy a new business, how does this impact my retirement plans?
- If I buy a business, how long will it take to realize the full value of the acquisition and does this fit my timelines?
- If I build my current business, does this mean I’ll have to work longer to ensure it is worth more when I exit?
Analyze Your Risk Factors
Risk is a core driver in this decision. I believe there are risks on both sides of the equation. If you buy a business and it doesn’t work out, you might not recover financially or emotionally. If you don’t buy and choose to build your business and it grows slowly, you might miss out on opportunities.
Generally speaking, most entrepreneurs feel that the safest option is to build their current business. If their company is profitable and growing, they probably have good reason to assume this will continue.
However, if the competition is growing faster than you and new technology that is financially out of reach is changing the game, an acquisition may be forced upon you. At certain times in the history of US business, the operating assumption has been that you either have to buy, get bought or get put out of business by the competition.
If you feel as if that is your situation, here are a few key questions to help you think about your risk factors:
- Can you actually do this? Do you have the time and energy it takes to meld two companies together?
- How confident are you that the acquisition will work-out? On what do you base this confidence?
- What happens to your business if the acquisition fails or under-performs? What data do you have to back up these analyses?
- What happens if the economy tanks? Do you have the financial strength to withstand a downturn?
- How does the culture of your current company fit with the company you are considering?
- What growth opportunities might you miss if you put a long-term growth plan in place instead of buying a new company? Can you live with missing those opportunities?
Don’t Do This Alone
Have you ever noticed how easy it becomes to make a difficult decision the second or third time? The first time you have to make an important decision, it can be nearly overwhelming. This is why I advise you not to make the build or buy choice by yourself.
For many of our clients, it’s an every-day decision about how much to invest back into their business. Most of our clients plan to build their business and have financial models already developed that account for those investments. But the decision to buy a new business is rarely common.
Many entrepreneurs will only make this decision once or twice in the course of their career. So you don’t get much of an opportunity to practice it and get good at it. With the consequences being so high, it is not advisable to make choices of this magnitude without a sounding-board and someone to help you analyze the data.
This is where an objective third party can really help you. I believe you need someone to ask you questions and help you sort through your priorities as much or more than you need someone to help you get the technical details right.
There are many advisors who can examine the details of a transaction. However, there are probably only a limited number of people in your life who you trust enough to explore your long-term plan with, someone who can help you envision the future you want to live.
I aspire to be that kind of advisor for all of my clients. Yes. I am absolutely committed to getting the technical details right, but there’s more to large decisions than these details. We can get all the technical details right but if my clients are not on the path to the future they really want after I helped them, then I don’t think I did my job.
I want you not only to make the right decision in the moment, I want you to have zero regrets five and ten years down the road. This is why I asked my client the most important question – why do you want to buy this business? Who is asking you these deeper questions?
If you don’t have this kind of relationship today with an advisor you deeply trust, I encourage you to take a close look at the CASEY NEILON ENTREPRENEURIAL EXCELLENCE program. This valuable program produces peace of mind for entrepreneurs who are facing complexity. The program takes a holistic look at your entire situation to ensure you are getting the best possible advice to achieve your goals.
Lucas Gonzalez – CPA, Manager
I am a Senior Accountant at Casey Neilon. In this role, I provide business and tax consulting for small to medium sized businesses and individuals. I have been serving clients in this capacity since 2013. My experiences have taught me about the challenges that a small business owner faces on a day-to-day basis and just how valuable it can be to that business owner to have trusted advisors they can regularly call on for advice and guidance.