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How entrepreneurs can strategically buy companies

by Ana Lopez
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Founder and Director, LQ Logistics LLC.

Entrepreneurs don’t have the steady pay that comes with corporate jobs – their livelihood depends on their ability to grow and scale their business. But growing and scaling just one business is risky because if that business declines or fails, it could spell the end of entrepreneurial life and force entrepreneurs to enter or re-enter the business world.

To maximize their chances of success, entrepreneurs should pursue more than one income stream. One of the best ways to do this? Strategic purchasing of companies. Purchasing existing businesses can give entrepreneurs an edge in generating ROI without the hassle, time, and financial commitment associated with starting new ventures from scratch.

There are several businesses for sale at any given time, but if you are an entrepreneur, you shouldn’t buy just any business. Instead, take a more strategic approach.

1. Find a company that complements your existing one

Carefully consider how any business you might purchase will help you achieve your professional and personal goals. In my experience, buying a company that is complementary to your existing one is usually the wisest move you can make.

While you can certainly choose to buy a business that has nothing to do with your existing job, such as buying a fast food franchise when your primary business is a digital marketing company, I don’t recommend it. By finding a company that complements your existing one, you can use both companies to share resources and reduce costs. For example, I decided to purchase a clinical laboratory because I was outsourcing drug testing for my logistics company. I realized that instead of doing that, I could keep that money for my team and myself, streamlining drug testing at my logistics company and my other companies in the process.

There can be many types of companies that can complement your existing one, but to determine which one is best to buy, you need to identify your current pain points. For example, if you run a real estate company, it might make sense for you to buy both an interior design company and a home inspection company. But after doing an analysis, you might conclude that your real estate company has a greater need to connect clients with a reliable home inspection company, and that makes more sense to buy at this point.

2. Do your due diligence

Before signing any paperwork, do your due diligence to research the company you are considering buying, with the guidance of attorneys, accountants, and financial advisors.

First and foremost, examine a company’s financial statements, assets, liabilities, and contracts. Make sure you access original copies and work closely with the right professionals to search them. Some people will paint a pretty picture to sell their business. Don’t believe their words – believe the numbers you see on the page.

It is also critical that you delve into any potential legal or regulatory issues. Buying a business in an industry that is highly regulated or likely to face regulation in the future can require a significant time investment that you may not want to make.

In addition, evaluate a company’s customer base, market position, competition and growth prospects. Also discover the state of the company’s industry, including trends. All this information helps you identify potential challenges or opportunities. For example, if you realize that the company has lost a significant portion of its customers to the competition, you will probably need to review its marketing activities.

Your research should also include evaluating the company’s reviews. Search reviews across platforms to understand how customers perceive the business. If most of the reviews are negative, it may indicate that the company is a bad investment, or that you should rename the company if you go ahead with the purchase.

Don’t just read customer reviews either. Read employee reviews on sites like Glassdoor and Indeed, as these reviews will tell you more about the company’s reputation as an employer and how easy or difficult it might be to hire if you go ahead with the purchase. Since former employees (not just current ones) often leave these reviews, you need to evaluate the company’s reviews holistically existing team and culture. Try to get one-on-one time with employees to learn more about them. Explore the team’s skills, expertise and dynamics to see if the team aligns with your vision and can support the company’s future growth.

3. Create an effective transition strategy

Buying a business is only part of the equation. To generate revenue, you need to create an effective transition strategy.

Think about how to optimize operations, develop the team, build strong customer relationships, and keep track of finances. Be prepared for tough decisions like overhauling workflows and restructuring the team. If you don’t have experience in that particular industry, don’t hesitate to ask for help.

While you will eventually need to revamp the business to align it with your goals and vision, try not to go too far with changing things. After all, you bought an existing business so you don’t have to reinvent the wheel, and can instead focus on driving your entrepreneurial goals.

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