Buying and selling businesses, is also business (Part 2)
__Buying a business: six key questions.
A good entrepreneur must never be too sentimental towards a business. There’s a time to buy, a time to sell, and even a time to close a business. It's all business, and in a successful business career, you must have the capacity to do all three.
In the first part of this series, I introduced you to the subject of "buying or selling businesses." As an entrepreneur, you need to be aware that buying or selling a business is also part of business.
Let's look first at the subject of buying a business:
__You must always be very clear why you want to buy a business. Many people buy businesses, filled with emotions, yet with very little analytical work to justify their decision.
A friend of mine, with a great job, once came to me very excited that someone he knew was planning to sell his business, and he wanted to buy it. And as often happens in such situations, he wanted me to help him fund it.
Having listened to him quietly, I asked a simple question, "Why do you want to buy a business?"
"I have always wanted to get into business," he began.
"So, why have you taken this long?” I asked, adding, “After all these years, you could have already started something of your own; so why now?"
I wasn’t asking these questions just to be difficult. I wanted to see if he was an entrepreneur, or just someone hoping to make himself more wealthy.
After we had discussed for a while, I asked him: "Tell me what you’re going to do with this business, once you acquire it?"
Whether you’re buying a business for the first time, or you’re a giant multinational buying a business, these same questions always apply:
1. What is the motive behind your decision to buy a business?
2. What will you do with it, to grow and expand it, once you’ve acquired it?
3. Do you have the capacity to run and develop the business that you’re planning to buy?
4. What will you to pay for it, and how did you reach that price?
5. How are you going to pay for it?
6. What are the challenges and risks you will face that are outside your control?
When buying Neotel South Africa, we had to answer each of these questions, methodically and dispassionately, sometimes bringing in outside parties to test our answers to each question.
__These are principles you must write down carefully. Many books are also written on the subject. Believe me, I’ve read books and articles on acquisitions over the years, including those that failed spectacularly.
In a big company like Liquid, management must convince both the board and the investors. Then, of course, there are the banks and, in this case, there were lots and lots of banks.
Going back to the story of my friend:
I'm always skeptical about people who try to get into business by buying a business, unless they happen to be managers of the business they’re trying to buy. In most instances, when people opportunistically try to buy a business that’s on offer, it ends up badly. It either ends up struggling to keep its original glory, or they simply go out of business.
Most big businesses are not opportunistic buyers. They know exactly what they’re looking for, and they’ve usually been watching the business they propose to buy for quite a long time.
Every week we’re offered businesses to buy. I always, always, apply the six rules I’ve listed above. Once I can tick off the boxes on most (if not all) of those questions, in a methodical and dispassionate way, we can begin to look at it. Otherwise, I say thank you, and move on.
To be continued. . .