1 Are your organisations matched?

It’s one of those horrendous jargon-heavy terms but ‘cultural synergies’ has a ring of truth to it. If your company and the one you’re planning to buy aren’t culturally similar in at least some ways then a potential car crash is in the offing once the two organisations come together.

The expense of buying a business and all the risks that entails can be greater than the cost of building the business organically. Samuel Roser, Intelligent Business Transfer.

Samuel says many of his clients focus too much time on comparing stock levels, listings, IT systems, market coverage and demographics and too little time looking at how the principal values governing the two companies differ.

“Culture means the style of the leadership, the sales strategy of an agency’s negotiators and the way the company is managed”, says Samuel. “If these values are very different to yours when you buy a company and the two are thrown together without care, then staff will begin leaving or start underperforming.”

Shaz, on the other hand, takes a different tack. He says, “The first thing you should be looking at is a competitor who you have regularly come across. You want to be able to say ‘here’s a business that does exactly what we do; is in the same market and has a team with skills that will add synergy to my business.”

Ask yourself, does the business work without the owner there; how long are they going to stay after you buy the business? Shaz Nawaz, AA Accountants.

2 Does the business really fit your plans?

Businesses usually look at buying another one for good reasons. Maybe it’s to gain market share or increase profits or turnover. But if buying a rival doesn’t really fit your plans once you’ve looked at its books and its team, walk away. Samuel says too many property clients don’t and end up ‘acquiring for acquiring’s sake’.

“Otherwise you’ll end up paying over the odds for a company which has the same stock or inventory as you do and loads of geographic overlap, which doesn’t achieve much for all the cost and effort,” says Samuel.

The idea is to for an acquisition to be complementary, not a clone of your existing business. “Remember that the expense of buying a business and all the risks it entails can often be much greater than the cost of building up an agency organically,” he adds.

3 Do you know the seller’s mind-set?

Many property business sellers are nearing or at retirement after running very successful businesses for many years. The danger of these, says Samuel, is that in the property sector they are often ‘lifestyle businesses’ and much of the value (up to 50%) is in the people who want to retire – it’s their expertise and contacts that made it so successful.

“The problem is that these people often haven’t really thought about their ‘exit strategy’ so you’ve got to create one for them,” says Samuel. “That either means making them an offer that delivers their retirement plan – so you’ll need to try and understand that. Or you can offer an ear-nout agreement. With these deals the seller gets a third or half of the business’s value and then stays to ‘earn’ the rest over a set period – usually one to three years.

I’m a big fan of the Joint Venture. There are people out there who have the money but not the expertise in the property market – it can work really well.

“Earn outs are popular because the buyer doesn’t have to borrow or spend so much cash to acquire a business – in return the seller usually gets a better price,” says Samuel. The downside is that the seller may have to delay retirement for a few years, it’s a good idea to approach a target business as early as possible if you think the owner is contemplating retirement.

4 How will you fund it?

If you’re buying a business worth between £100,000 and £500,000 then a bank loan is the best source of funding at the moment, says Samuel. If you’re buying a business worth over £500,000 then private equity is usually the most common.

“Everyone’s talking about crowdfunding as an alternative but so far it’s peripheral. Earn outs have been the rising trend among our property clients,” says Samuel. Shaz, however, disagrees. “In my experience crowdfunding is very popular at the moment and, whichever crowdfunding platform you use you can raise money within a eights days, whereas with a bank it can take eight weeks, along with all the restrictions that come with bank lending.”

5 Why are you buying IT ?

One strategy is to see an acquisition as an opportunity to increase profits by acquiring turnover, reducing costs and therefore increasing overall profits.

“People often don’t realise what the opportunity to increase profits can be. Because you acquire turnover without taking over all the costs – many are already covered by your existing business – accounting, HR, and so on,” says Shaz.

“But it’s important to watch out for business debt when you’re buying a business. Ensure that you have a clear and legally binding document from them that lays out who their clients, staff and debts are. It’s really important to carry out the due diligence before you buy.”

6 Are you rushing to buy?

“A lot of my clients want to buy a business ‘yesterday’ but I tell them to take their time, meet the new team members as well as the businesses’ management and their staff too,” says Shaz. “Many people don’t talk to the more junior team members of a target business because they want to keep everything under wraps, but you find out so much from them about a business. “They will give you a very different perspective compared to a business owner. Also, don’t look at just one business in the market place; take your time, look around, ensure you talk to at least two or three different businesses so you get a good deal, and that you aware of what’s out there.”

7 Are you paying a fair price?

Look at the profits and pay three to five times those profits, based on EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) if turnover is less than £5m, says Shaz. “Remember that the bigger the company, the bigger the multiple of the profits,” he says. “Also, look at what assets the business has, and ask yourself ‘does the business work without the owner how long are they going to stay after you buy the business?”

8 Are you buying at the right time?

During the last recession there was a flurry of business buying in the property industry as cash-rich agents bought up rivals, which is an accepted and popular strategy. The idea is that a weak business is likely to be bought by up by its cash-rich and more successful rival, usually because the less successful business is unlikely to get bank funding to get through the recession and leaving its owners with no choice but to sell up and ‘cash out’ before business gets more difficult.

9 DID you consider joint venture?

“A popular form of funding is the joint venture – something a lot of people don’t think about,” says Shaz. “There are people out there who have the money but not the expertise within the property market but who are interested in property. If you can find out who they are and where they are – then that can work really well. I’m a big fan of joint ventures.”

10 Will it make you happy?

Well, only time will tell! Good luck!

CONTACTS TO HELP YOU BUY:

Shaz Nawaz www.aa-accountants.co.uk
Samuel Roser www.intelligentbusinesstransfer.com
The Haversley Group www.thehaversleygroup.com
Adam Walker www.adamjwalker.co.uk
Addisons www.addisons.co.uk