Expanding your Australian business through acquiring a smaller company is a strategic move that can open up new avenues for growth and diversification.
However, exercising caution and diligence is important before making such a significant commitment.
Buying a business is an investment that could result in a well of liabilities if certain aspects have been hidden.
In the world of mergers and acquisitions (M&A), success often hinges on the quality of the questions asked.
Find out how thorough due diligence can seal the deal of any M&A transaction in our video from Elements Advisory Group partner, Marcus Hill.
Let’s delve deeper into the five most basic questions a business owner needs to ask before acquiring a company.
1. Why is the business for sale?
Understanding the motivations behind the sale is akin to peeling back the layers of an onion. While some reasons may be benign, others could signify underlying issues.
For instance, consider a scenario where a local retail business is up for sale. The current owner might cite retirement as the reason. This may seem reasonable until you discover that declining foot traffic and increasing competition have led to declining sales.
In this case, the business may not be as appealing as it initially seemed.
2. Is this a good industry to step into?
Before you leap into a new industry, conduct thorough research to assess its attractiveness. Let’s say you’re eyeing a small technology startup for acquisition. You must evaluate the industry’s growth potential and stability.
For instance, during the COVID-19 pandemic, some tech sectors, like remote work solutions and e-commerce, experienced substantial growth. Understanding these trends can help you make an informed decision.
3. Have you done your due diligence?
Due diligence is the cornerstone of a successful M&A transaction. Imagine you’re considering acquiring a manufacturing company. Upon digging deeper, you uncover an unpaid tax bill that the current owner failed to disclose. This unexpected liability could significantly impact your post-acquisition finances.
By conducting due diligence before an M&A deal, you can uncover any red flags in the financial information. By thoroughly examining financial records, legal documents, and conducting background checks, you can avoid hidden risks before they become your responsibility.
4. Does it have an existing business plan?
Having a well-documented business plan in place can save you time and effort as the new owner. Suppose you’re interested in a marketing agency. Knowing that they have a comprehensive business plan that outlines their client acquisition strategies, revenue projections, and growth goals can be reassuring.
However, assessing the plan’s relevance and adaptability to your vision for the business post-acquisition is essential. Additionally, check any strategies placed in motion, as many take time to yield results, and you may inherit the outcome.
5. Are your management team and staff up to scratch?
The people behind the business are just as crucial as the business itself. Let’s say you’re acquiring a small restaurant chain. You need to evaluate whether the current management team possesses the skills and expertise required to maintain and enhance the restaurant’s reputation. Even if you would like to maintain buyer and seller relations, high-level human resources make for a smooth transition into the new management.
Additionally, assessing the morale and performance of the staff will help you gauge whether you have the right team in place to execute your post-acquisition plans effectively. Maintaining a quality staff impacts business operations and profit margins.
Have you done your due diligence?
Acquiring a business through M&A can be a game-changer, but it’s a decision that should be made with care and thorough examination.
These five vital questions serve as a compass to navigate the complexities of the Australian business landscape.
Before undergoing the acquisition process, ensure you have a strategic business plan and do your due diligence on the target company.
Remember, the success of your acquisition hinges on the answers you uncover during this critical due diligence phase.
Elements Advisory Group has highly experienced advisors who assist clients throughout the process of a merger, sale or acquisition.
We have a process that is designed to drive the highest level of probability of a beneficial transaction occurring.
Contact us to find out how we can help you.
