Acquiring a business can be a smart decision. It can allow your company to acquire new talent or new facilities. It can increase your market share or help you move into a different area of the industry in which you currently operate.
Acquiring a business rather than trying to slowly build a similar business from the ground up means that you connect with a turnkey operation that has resources ready for you to utilize. Unfortunately, acquisitions can fail. Sometimes, they even undermine the stability of the company making the purchase. What is the top reason that business acquisitions fail?
Overpaying to acquire the company
The single biggest risk during business acquisition is the possibility of overpaying for a company. When you invest more than a company is worth, you may not be able to recoup the investment made. The more you overpay, the greater the negative impact of the acquisition on the company that does the purchasing.
The best way to protect yourself from this risk is by carefully performing your due diligence. You need to know all of the relevant details, from the terms of individual employment contracts to the existing debts. Even the age of machinery or other equipment could significantly diminish what a business is actually worth.
Realizing that you cannot take someone’s word and evaluation of their company at face value and must instead review the data independently can help you protect yourself. You will be in a better position to negotiate an acquisition and to set a reasonable limit so that you don’t fall victim to the enthusiasm of an auction environment, for example. Recognizing the risks that come with business acquisition can minimize your vulnerability during a big transaction.