The Five Most Common Mistakes when Buying or Selling a Business

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For most business owners buying or selling their business is a rare event indeed. In fact many owner managed businesses do it only once, when they exit their business to retire. Like most things in life the first time you do something is the occasion when you make the most mistakes. If you are selling a business you can't afford to make mistakes because its the only chance you'll get.

When buying a business  making a mistake can leave you not only seriously overpaying for a business but having a management headache which may take years not months to put right and in the meantime will seriously damage the prospects of your current business.  

It may be some comfort to know that it is not just smaller businesses the make horrendous mistakes, big businesses all too regularly fall into the same trap. I know from personal experience the the business I worked for in my last corporate role was purchased by another company and the acquisition almost brought the acquiring company to its knees, because as far as I could see it made two of these common mistakes.

Mistake No1 Getting emotionally involved with the sale.

SOLD! (Photo credit: my_new_wintercoat)

Lets face it, its exciting to be buying or selling a business and it requires a lot of management time. For the vendor selling a business  there is the prospect of making that exit and having the money to retire. For the buyer there is the undoubted prestige of acquiring a business and the prospect of a big jump in company size or new geographic coverage.

The result for the unwary buyer is that in buying a business they get duped into paying too high a price because they get wrapped up in the chase. For the novice seller the process of selling the business gets dragged out over a long period of time, causing them to take their eye off the day to  day management of the business, often leading to a downturn in its fortunes and so its ultimate price. 

Mistake No 2 Not Having a Walk Away Number

Negotiation Cartoons: Positions Vs. Interests (Photo credit: jonny goldstein)

Buying or Selling a business involves negotiation, in order to make sure you don't pay too much when buying a business or get paid too little when  selling a business you need to establish 1. what is the value of the business and 2. what is the maximum you'll pay or minimum you'll accept. Once you've established this you'll be much better placed in the negotiation and you'll be less likely to make mistake No1

Mistake No 3 Not understanding the Impact of Culture 

This Ladies and Gentleman is the big one, of all the issues that get overlooked culture stands head and shoulders above everything else. Good businesses have strong cultures, their staff have bought into the fact that their way is the right way. Now imagine what happens when these staff are told, that their way is no longer the right way and your way is the right way. Yes that's right they'll find every reason to demonstrate the flaws in your system and why your way is not the right way. Worse they are butting up against your staff who are equally convinced that your way is the right way. So you tend either to have a very difficult integration problem because you now have two opposing camps or you have an attrition problem as the staff from the acquired company leave.

The seller will of course say that culture isn't a problem, because to him it isn't. Either there isn't a problem with culture or its too late for you when you find out there is as he's already got his money. Why don't people address this problem? Firstly because so many don't even recognise it as an issue and secondly because the have made mistake number 1 and are looking for reasons to buy rather than looking for issues.

Mistake No 4 Underestimating Management Effort

Buying a business is just the first step, now you've got to integrate it with the rest of your business so that means addressing, culture, strategy, planning, financial systems, sales, customer relationships a new organisational structure to mention just a few. The management effort to achieve this is considerable even if you have willing staff , so don't be surprised if it takes 6 months to a year to get it all bedded down. This effort is considerable even if the new acquired company is small in comparison to yours.

 Mistake No 5 Buying a business that is too big or too small

This tends to relate to the problem of biting off more than you can chew. Remember the bigger the business you buy in relation to you the acquirer the more political clout it will have and the more concessions you will have to make, and the longer integration will take. The more your management is focused on the acquisition the bigger the risk that they will let your core business slip and then you have a really big management headache, that is, trying to integrate the new business and recover your own.

The other side of the coin is that you waste your money on something too small which won't payback a recent return on all the management effort required to integrate it into your existing business.

Once you understand these problems you are on your way to avoiding them and making your acquisitions a success and not a millstone.

Related articles

• Join Merrill DataSite's Webinar on February 14th: Avoiding the common pitfalls in M&A transactions
• Why Networking Helps You Sell a Business
• Common Mistakes in the Sale of Business and How Advanced Planning Can Fix Them

• 10 Questions You Must Ask Before Buying a Business

Exigent Consulting provides specialist services for High Growth Businesses, Business Turnaround, and Mentoring to the Small and Medium Business. We help business owners improve the profit performance of their business. 

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Culture - Finding Out What You have

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Recently I wrote about the importance of culture in supporting high growth persistent businesses. I've had a couple of requests from business owners if there was somewhere they could get a sample list of questions which they could use as a starting point for a survey on culture. Not having found anything immediately available I put together a list of 20 sample questions that I thought might be useful.

The question on culture are as follows, fell free to use them as you wish. The most important factor to consider is that answers should be anonymous otherwise your employees will be too busy trying to second guess what they think the answer should be rather than what is the truth.


1. Is the pressure to perform unreasonable?

2. Are targets set by managers unreasonable?

3. Would you prefer to work for a fast moving innovative company or a slow moving cautious company?

4. Is it sometimes difficult to ask questions or raise concerns?

5. Are we a  quality company?

6. Is bad conduct rewarded, tolerated or punished?

7. Is there a close tie between performance and rewards?

8. Do employees consider that the company understands and sufficiently care about the needs of its customers?

9. Is the quality of products and/or services a high priority?

10. Are employees proud of our products and/or services?

11. Do we sell our products based on price or quality?

12. Would you get more criticism for violating an ethical principle than not meeting a deadline or target?

13. It is safe to voice your opinion…true or false?

14. The company turns a blind eye to unethical behaviour if it means getting a sale...true or false?

15. There is one code of ethics for everyone....true or false?

16. We are encouraged to admit mistakes and learn from them...true or false?

17. Are you asked to perform tasks that your mangers would not be prepared to do?

18. Do you ever feel let down by your colleagues?

19. Are your mangers supportive?

20. Which words do you think best describes the company culture as Open, Oppressive, a Meritocracy, Political, Supportive or other?... please specify.

Once you have this information you can follow the steps from my article Culture - getting the one you want on how you can implement changes.

Exigent Consulting provides specialist services for High Growth Business , Business Turnaround, and Mentoring to the Small and Medium Business. We help business owners improve the profit performance of their business. 

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The Problems of Managing High Growth

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I am departing from my usual form of posting to include a link to an excerpt from a recent Webinar on managing high growth businesses. This short section, about 5 minutes, explores the problems of managing high growth and the consequences if not managed properly. 

As this is not my usual form I am especially interested in our feedback as it will help me decide i this approach is worth adopting for future posts.

Exigent Consulting provides specialist services for High Growth Business , Business Turnaround, and Mentoring to the Small and Medium Business. We help business owners improve the profit performance of their business. 

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Managing a High Growth Business: The Problems of Badly Managed Growth

Running a high growth business, requires a good deal of planning, and active management. It also requires a longer term view, unfortunately in very many cases fast growth happens by accident and therefore without sufficient planning to maintain growth and certainly not as a result of any long term view.  


Never is this more relevant than when talking about plans for growth. The chart explains what happens all too frequently during a period of high growth. This is that after a year of rapid growth the organisation struggles resulting in little or negative growth for the next 18 month to 2 years before resuming . This is extremely stressful for businesses and often results in management backing away from further high growth because of the difficulties experienced 


These difficulties include :

1. Huge effort from owners and staff delivering little or no rewards
2. Minimal or even negative financial returns as the cost of correcting the consequences wipe out most or all of the financial gains.
3. Deteriorating customer relationships because service levels cant keep up with revenues.
4. Low staff morale leading to lower productivity and high staff attrition which is made worse because typically that attrition is made up with a disproportionate amount of your best people.
5. Finally lost opportunity as management adopt a very cautious growth strategy because their experience of high growth was so painful.

It needn't be the case, making sure you manage the special circumstances that come with a high growth business you can maintain consistent growth over a longer period and consequently become a larger business more quickly and with much less pain.
  

Exigent Consulting provides specialist services for High Growth Business , Business Turnaround, and Mentoring to the Small and Medium Business. We help Business Owners improve the profit performance of their business. 

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Managing Fast Growing Businesses: The Planning Process

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Image via Wikipedia

Managing Fast Growth

Whilst planning is important for all businesses it is vital in a high growth company. More importantly planning needs to be more thorough and detailed than in companies where growth is at a more leisurely pace. Its obvious really, issues come at you faster and more frequently in a high growth scenario and you and your management team need to be ready to deal with it. You can’t do this in a purely reactive mode, you and your management team need to have explored in detail the key linkages in your business and have some understanding of the potential stress    points as well as solutions for different scenarios.   If this seems a bit of overkill, it isn’t. Having been in the senior management team of a business that grew from 250 to 3500 staff in less than 10 years I know the pressures consistently fast growth puts on an organisation. One of the key reasons why so few businesses can consistently manage a high growth rate is because of this management commitment. It also demands that owners/directors have confidence in their management team and that they are able to properly delegate responsibility to this team.

So How Much Detail is Enough?

The answer is as much detail as you can get. The more detail you can obtain the better. I’m not just talking about P and L information but key metrics that drive the business, for example production metrics, recruitment metrics, detailed overhead costs, detailed variable costs, machine performance, average earner income, average earner output, recruitment costs, sales cycle length, average order value, and so on.  The benefit of this information is to provide you with a very detailed understanding of your business. It also offers you a broad range of levers to use in guiding your business through the inevitable ups and downs of life. Most importantly it gives you a number of early warning indicators that if acted upon will require only a gentle nudge on the tiller, rather than a last minute heavy handed yank.

So Now You’ve Got it What Do You Do With It?

Image via Wikipedia

Managing Fast Growth

Once you have all this information, you develop a reporting mechanism/model which requires all 
key members of your management team to understand report and manage their functions or business using this standard. This is vital to provide the management team with the same business information where ever they are in the organisation, it also means that whatever job they do they can quickly get to the key information because they will be familiar with the format. In a high growth business, management regularly move around a so need support of model so they can quickly get to grips with their new position as the information and its format will be the same. 

In a personal example I was relocated from the UK to Australia. When I arrived I was able to get up to speed very quickly because the model used down there was exactly the same as that which I used in the UK! 

It should become the basis of your regular management meetings as your knowledge of the model increases you will be able to more accurately predict company performance and be better able use the information to avoid difficulties.

Exigent Consulting provides specialist services for High Growth Business , Business Turnaround, and Mentoring to the Small and Medium Business. We help Business Owners improve the profit performance of their business. 

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Are you Working for a Madman?

As the owner of a small business you are responsible for everything. You will have discovered by now that running a business is a lot more complicated than you first thought and producing your product is only a small part of running a business.

Typically businesses are started for two reasons firstly because the owner was made redundant  and secondly because the you thought you could do better than your current owner in making it, delivering it  or providing the service.

Now that you've started your new business you really start to get stuck in. You've got to find orders so you go out and sell, process the orders arrange to have you product and or service made and delivered. Next you've got to arrange to invoice for it the to make sure you get paid, chase debt, provide information to the authorities on profit and earnings; take on and manage staff (never easy), set manage and review the company strategy. To keep the company successful you must keep this cycle moving 

Pretty soon you're actively involved in all these areas, yes you've employed staff but they don't seem to have the drive or the enthusiasm to get it all done, so you cover.

You've had your business now for 2-3 years its bigger but your working harder and harder to keep on top of things, your get a reasonable salary but probably if you dare calculate it you are the lowest hourly paid in the company. You get less time off and your working weekends.

If this looks like you -  then you're working for a madman: and the madman is you!

So how do you bring back sanity?

Well the first thing to do is to find a way to change “insanity” as they say “is doing the same thing today as you did yesterday but expecting different results”

Change is what is required and it starts with you.

So the first thing to do is to put some clear structure down for your business and do some business planning. Next identify which functions you are best suited to best and give those your least able to do to others. Third get some structure and processes into your business, yes but you say I already have that. Then ask yourself can this process run smoothly without your intervention and is there a step by step guide. If the answer is no which I suspect it will be then you don't have a process.

Fourthly, work your way out of jobs, that is to say once you've got a structure and a process mapped out give that work and responsibility to someone else, your job is to manage them not do it for them.

Whilst this is straight forward it is not easy, the day to day problems caused by your lack of structure will not immediately go away but if you're persistent you'll see tremendous benefits.

Exigent Consulting specialises in providing Business Turnaround, Sales, Marketing and Mentoring to the Small and Medium Business. We help Business Owners improve the profit performance of their business.

3 Steps to Successful Sales Forecasting

In most businesses this (the 4^th) quarter is the busiest and much sales effort is focused on getting the best results from these critical weeks. However good sales managers are also preparing get to grips with next year's sales targets. This is an important activity because the earlier issues are identified the more time there is to adjust strategies to meet them. Whilst it is important to continue to focus on getting the numbers for this year, for sales management it is vital to understand the nature of the challenge for next year. This analysis is as relevant for the owner managed business where the MD is often the sales manager, as the larger organisation where is has a well developed sales function.

Often it takes a month or two to re orientate your sales activity and doing it now (in Q4) gives 12 months to shoot for next year's target rather than maybe 9 or 10 months if left till the first month of the New Year.

Putting together a simple forecast requires one to break projected sales down into 3 areas, Known, Seen and Unseen. So what do these 3 categories mean? What is their significance? Let us look at each one in turn. This forecasting method is really only applicable to B2B sales, retailers have to use a different method which will be the subject of a future article.

Known sales are those which come from your existing accounts, so you can, based on previous years, fairly accurately estimate your income for the coming period, whilst we all know that individual account incomes vary from year to year it should be possible to approximate the likely revenue. This number for most businesses this will represent a large % of the overall target

Seen sales relate to a category of sales which estimates income based on the long term pipeline and an estimate of what percentage of sales tend to come from new business. Typically this would be the total value of the pipeline factored by the likelihood of success.

Unseen sales comprise that proportion of the sales target where you have no indication of where these sales are coming from. These are, t0 paraphrase Donald Rumsfeld, "unknown unknowns" This element represents the risk in your forecast. The larger the percentage of unseen sales, the more risk there is in the forecast.

Once you have these figures it should also direct you where you need to concentrate your sales effort be that new business development or maximising revenue from your base accounts. If you're trying this for the first time don't be too cautious in forecasting revenue, there should always be an element of unseen in the forecast depending on the type of business it can vary between 10-35% as a norm, anything more than that would indicate that the forecast is too optimistic and is unlikely to be achieved.

Forecasts have to support management objectives but if they are too unrealistic the sales force will very quickly find this out and the target will be disregarded and there will be no real attempt to achieve it. Accurate forecasting is nonetheless an important component in managing your business and an important tool in how it will be developed.

ExigentConsulting specialises in providing Business Turnaround, Sales, Marketing andMentoring to the Small and Medium Business.We help Business Owners improve the profit performance of their business

Are Social Media Businesses Viable?

My thoughts recently have been about the business model for many if not most of the major Social Media infrastructure sites around today. The question I have been asking myself is, how will Social Networking sites make money?

This is a serious issue, and the current hype over Social Media sites, reminds me greatly of the situation in the middle of the Dot Com boom, when everyone was so carried away with the idea of Internet based business that they forgot the basics of business, that is there must be a way of making money out of the business otherwise it Will eventually fail.

Parallels are everywhere, Twitter the current doyen of social networking sites, not only does not make any income; but further there is no facility in its current business model to make any money. Twitter, according to recent comment raised nearly $100m on top of the $35m raised in February, yet it still has no way of generating any income. The question we ask is what happens to investor sentiment when its astronomical growth figures inevitably slow: recent reports, in the USA at least, suggest this may be happening now.

Similarly Bit.ly the default url shortner for Twitter has no method of generating income neither has budurl or tiny. These are key infrastructure players in the social media landscape yet they have no workable business model. Further there is a host of apps for the likes of Twitter and Facebook which are free. I find it rather disconcerting to think that much of the infrastructure platforms that underpin Social Networking don't have a viable business model. It's also somewhat ironic to think that those same platforms are filled with users propounding the benefits of monetising social networking and exhorting who ever will listen to do the same.

Once they hype cools and sentiment becomes more cautious, or realistic depending on your viewpoint, then investors will be looking for a quick return i.e. a trade sale, failing that, they'll curtail and then stop further investment as the prospect of a reasonable returns diminish. The worrying aspect to this is two fold firstly, who exactly will buy them: I cant see Facebook, the only Social Network business with the muscle to pay the prices that are likely to be demanded, going on a spending spree, it doesn't need too. Google could of course, but currently seems to have its attentions elsewhere and its previous foray into Social Media with Orkut was a dismal failure. So wherelse are the buyers? The omens aren't good; outside of the industry no purchase of a large scale social media business has been successful. One thinks of Fox's purchase of Myspace and ITV's purchase of Friends Reunited as classic examples.

Secondly, any difficulty in getting further funding could lead to radical shifts in service and costs for participation as survival takes precedent over funding. This could mean either a wall of advertising, or subscription; neither model is frankly appealing. You need a lot of advertising to payback about $150million and support the infrastructure and make ongoing profits. Subscription would stop growth dead, since buyers wouldn't want to pay to talk to potential sellers, when everywhere else it's free

The warning is therefore not to take "free Social Networking" as a given; there is a real possibility that one of its key benefits "that it is free at the point of sale" may become a thing of the past.

ExigentConsulting specialises in providing Business Turnaround, Sales, Marketing and Mentoring to the Small and Medium Business.We help Business Owners improve the profit performance of their business.