Importance of Planning when Buying a Business - VR Business Sales Blog

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Thursday, September 3, 2009

Importance of Planning when Buying a Business

Peter King
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Considering that buying a business can be a scary process for some, here at VR, you are best advised to develop a business plan that can help ensure that you know what your goals are and how to achieve them. In essence, a business plan is a road map that helps you focus on something else besides your apprehension. VR will sit down with you and discuss the best course of action for operating a successful business; following the transaction every step of the way. Meanwhile, here are some points to consider. 
Examining Your Objectives
Before you buy a business and enter the marketplace, you want to consider your objectives – why are you doing this?  
  • Will your goals be met faster and at a lower cost by buying a business as opposed to developing one on your own?
  • Do you want to expand quickly into a new location by buying another business in the same field?
  • Do you want to buy all or part of a business to gain access to a particular technology that will significantly upgrade the competitiveness or extend the lives of your existing products?
  • Are you buying another similar business in order to utilize surplus manufacturing capacity and consolidate manufacturing operations?
  • Maybe you’re buying a business with compatible products or services that can be marketed through the same network as yours, taking advantage of a strong but underutilized distribution channel?  
Only when you’ve identified your objectives, can you start to examine whether buying a business is the best way to the accomplish them.  
Evaluating Strengths and Weaknesses
In order to be objective about the value that this business that you want to buy will bring as well as allow you to negotiate more effectively, you must understand their strengths and weaknesses of its current operations. Doing so as well as what you can do with the business with their products and market position given your personal strengths, skills and experiences, will allow you to help negotiate the price that you pay for it.  
Additionally, you should be doing a much more thorough evaluation if you’re looking to buy a larger business with an asking price of $500,000 or more or merging a business into your operation. In particular, you should be looking at three areas:  
  1. Marketing and Sales – Research distribution channels and pricing strategies;
  2. Manufacturing – Analyze product costs such as raw materials, labor and overhead, availability of materials, operational forecasts and condition and capacity of manufacturing facilities;
  3. Business’ Financial Position – Estimate the company’s future working capital and capital investment requirements, current talent and expertise and transferability of skills.  
Neglecting the Business Plan Results in Failure
Never forego the planning process because you will pay for it as a business owner. There are two categories of acquisition failures: logic failures, where the idea might have sounded good on paper but wasn’t; and process failures where the idea was in fact good but didn’t work.  
Logic failures result from the following reasons:  
  • Overestimated market potential;
  • Obtained poor information about the business that was purchased;
  • Environment changed
  • Bought a business in an industry too far removed from your own;
  • Bought the wrong business;
  • Hoped-for product never materialized.  
In order to avoid logic failures, you must have substantial planning in place. As for process failures, these can be avoided by properly executing the transaction after a plan has been made.


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