Business acquisition: a significant gap between dream and reality
If you dream of becoming an entrepreneur, you don’t necessarily need to start your own business from scratch. You can also take over an existing business through a management buy-in or buyout. Indeed, some 10,000 businesses are handed over every year. “If you ask around, you’ll find that many people underestimate the process that precedes this kind of management buy-in,” says Miguel Meuleman, Professor of Entrepreneurship at Vlerick Business School. “People are very optimistic at the start and have high expectations, but the search for a suitable business can easily take between one and two years. Furthermore, there is often a significant gap between dream and reality.”
A process of trial and error
An essential prerequisite to any successful business takeover is to invest time in finding the right business. “Many people give up because they never take the process seriously. It’s also an emotional rollercoaster. On average, it takes 18 months to find a suitable business,” Miguel explains.
However, a survey of delegates attending the Buy Your Own Company conference suggests that there are further barriers. Preparation—or rather the lack of it—is one of them. “Often, people haven’t pinpointed in advance what kind of business they are looking for in terms of size and sector. They don’t have a concrete plan and they have insufficient insight into business models, market risks, etc. In short: they haven’t done their homework.” However, those who are well prepared do not always have the right experience. “An SME and a multinational are two completely different things. And it’s not because you’re an experienced manager that you’ll necessarily make a good owner-manager of a business.”
Secondly, just over half of respondents indicate that they have too little knowledge of the process and are unsure as to how they should approach it. “The search for a suitable business is a steep learning curve. By looking at a large number of business deals, you will eventually understand which signals you need to look out for.”
Furthermore, just over half have an insufficiently clear picture of their own financial resources or are not sure what is possible with the budget available. For 40% of respondents, the figure is somewhere between 150,000 and 300,000 euros. “That is feasible,” Miguel considers. “You can also get quite a long way with a limited budget by looking at the right businesses and establishing the right financial structure. For example, you can choose to go into partnership with another (majority) shareholder, which immediately widens your choice of businesses considerably.”
Finally, it is especially difficult for young entrepreneurs with a limited budget, because they are last in the queue. There are always others waiting around the corner. The seller’s preference is usually for other businesses for which this kind of takeover is a strategic choice. These also have more money to put on the table. After that come the private equity players. They too are in a stronger position financially and are constantly in search of good investments. In third place are wealthy individuals who want to try it for themselves, or who want to help their children to get established.
Who is the prospective buyer?
According to Miguel, we can split potential buyers into four main categories.
1/ the dreamers
“These are people who are not yet ready to make the leap. They do not take any concrete steps, devote insufficient time to the process and are also poorly informed. They don’t really appreciate what taking over a business involves and they also have no insight into their own financial resources. Finally, they often do not share their dreams of becoming an entrepreneur with others, or do this to an insufficient degree. 20% of respondents had never spoken to anyone about it; the remaining 80% had discussed it with family or friends.”
2/ the consultants
“In their job, they come into contact with a large number of different businesses. They usually combine their search for a business with consulting and they don’t take big risks. This is a strategy that can work, but that often takes much longer.”
3/ the experienced managers
“These people are often a little older and have already built up a strong reputation and good financial reserves. They dream of concluding their careers as entrepreneurs. They too need to fully engage in the process in order to succeed, but opportunities are more likely to come their way spontaneously through the network that they have already built up.”
4/ the dedicated entrepreneurs
“This group goes for it 200%. They often give up their job and despite their limited experience and resources, they keep on trying until they succeed. Just 10% of respondents said that they had handed in their resignation in order to be able to focus on the search full time.
10% had already made an offer or had already invested time in five or more potential businesses.”
The questionnaire also asked prospective buyers to describe their ideal deal and ideal business.
- Three quarters opted for more industrial businesses, of which energy/environment (48%) and retail and consumer goods (44%) were the most popular.
- The dream business has fewer than 20 employees and a turnover of between 2 and 5 million euros.
- Plus points are: significant opportunities for organic growth, a strong relationship with customers, the growth potential of the sector, the potential to make the business more professional, a stable cash flow, the potential to be/become a majority shareholder, the business’s reputation, and a good rapport with the previous owner (who will sometimes continue to be involved after the deal).
4 MUST DOs FOR A SUCCESSFUL BUSINESS ACQUISTION
1/ Take your time. Be aware of the time investment required and adopt a serious and structured approach.
2/ Analyse your financial possibilities. And if necessary, go on a course to gain an understanding of the acquisition and sales process.
3/ Use your network. Talk to people: brokers, other people who have taken over a business, etc. The less people are aware of it, the fewer opportunities will come your way.
4/ Sell yourself. What do you have to offer as a buyer? Just like a start-up entrepreneur, you need to prepare a personal pitch about your plans and yourself. See it as the equivalent of a job interview.