The Reason You Should Never Purchase a Business

Early in my accounting and finance career, after I stepped away from KPMG and McGladrey & Pullen (as the firm was then named), I worked on a handful of business acquisitions and two different divestitures (one was small, the other was large). I was hooked. More specifically, I loved the work behind M&A (mergers and acquisitions).

However, most small business owners should never purchase a business. I’ve never seen detailed stats on success rates. For instance, what defines success? How long did that success take? Did the success happen because the purchaser overpaid for the business? I want those answers, but I never see them.

My only information is what I’ve experienced; success is hard when buying a business. Impediment number one is the buyer’s overconfidence, which is nearly impossible to discuss once they are dead set on moving forward with a deal.

In this brief discussion, I’ve provided the primary reason a CEO and her leadership team should never buy a business. Never is a strong term. The strong-willed CEO will get her way; just be prepared for harmful or unintended consequences.

The Primary Activities of Any Business

I can sum up any business’s activities in three words: finding, getting, and doing. In business terms, this means finding work, getting it, and doing it. Everything else is support and overhead.

The business focuses on those three primary activities: daily, weekly, monthly, and beyond. There’s little time to focus on anything else. That’s why significant initiatives such as an office relocation, a CRM upgrade, a new ERP system, or adding a new product line are daunting projects and exceed budget in time and costs once they are completed.

Should we think an acquisition will be any easier? Buying a business is not one of those three primary activities, which leads me to my next point.

The Big Learning Gap

There is a big difference between running a business and purchasing one. Let’s break down some knowledge requirements for buying a business in a simple conceptual framework:

• Before the Acquisition: pre- and due diligence activities, negotiations with the seller, and contract management with buyer and seller lawyers.
• During the Acquisition: onboarding staff. Systems are either integrated or run in parallel with existing technology.
• After the Acquisition: continued post-acquisition integration activities and troubleshooting new systems, processes, and technology requirements.

The above conceptual framework is far from complete, but the big idea is that some skills and capabilities are needed that may be missing from the leadership team. For instance, consider the following questions:

1. Can you create a simple due diligence checklist without looking for one in a Google search?
2. Do you know how to conduct or quarterback due diligence activities even if you hire a CPA firm to help with these efforts?
3. Do you have a strong financial analyst who has built numerous acquisition models that 1) quickly identify synergies, 2) reveal potential red flags with the combined numbers, and 3) address short-term capital needs?
4. Do you know how to price a business? Remember, there is a massive difference between valuing a business and pricing it. When buying a business, valuations are worthless and serve no purpose.
5. Do you have the skills to make the capital requirements work for the acquisition? Will cash be needed to support post-acquisition activities? In a spreadsheet, this is easy until your CFO keeps running the numbers and finds cash potholes that will require capital influxes from other sources (creativity is needed).
6. How comfortable are you working with attorneys? Heads up: get used to reading, rereading, and rereading contracts that will go through many iterations. Typically, your CFO and financial advisor will lead the charge, but you still need to skim each iteration of every document the attorneys provide.
7. Post-integration acquisition activities are complex. Anyone can buy a business. Integration is an entirely different story. How many have you done? What’s your track record?

Caveat Emptor

Harold Geneen is the most underrated CEO in modern business. Through strategic acquisitions, he built ITT into a major conglomerate. I wish I could have interviewed him. If so, my first question would have been, “Harold, tell me about your skills and capabilities after your twentieth acquisition compared to your first.”

We both know the answer to that question. During that first acquisition, ITT was winging it (not entirely, but they were still feeling their way through it). Acquisitions became the norm throughout any given year. His planning and acquisition teams got good at buying businesses.

Can you do the same? The acquisition you are contemplating may be your first and your last. Even if you hire experts, can you succeed?

In short, buyer beware.

1. Don’t be too confident.
2. Don’t assume all your projections will be realized in the financial model.
3. Don’t plan on the best employees from the acquired business will stick around.

Dealmakers are in the business of creating urgency for their clients. You will be forced to rush the acquisition process. But be deliberate and have the right people around you to help identify blind spots many steps ahead of the process.

The reason you should never purchase a business is because of a lack of skills and no experience. Overconfidence can fool you into thinking nothing can go wrong.

I’m not saying never to buy a business. Be prepared for varying levels of failure and setbacks. Perhaps if you get the opportunity again, you will be better prepared. Get all of the help you can. Make sure your expectations are realistic.