One Major Mistake People Make When Buying a Business

Richard Parker, Diomo Corporation, identifies an attribute some business buyers overlook in identifying acquisition targets: how they fit into the culture of the business.

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I received a call a few months ago from someone who found my website and said he needed to speak with me about an issue he has encountered after buying a business. He explained that he had purchased a profitable commercial landscaping company a year ago and the business started to go south within a couple months after he took over.

This was not in his opinion just a by-product of any economic downturn.

He was at a complete loss and asked if I could help him figure out what went wrong and so he hired me to do some consulting work. I met with him and I was immediately impressed by his business acumen and how articulate he was in explaining the current business. He had previously owned several IT and financial service companies and was undoubtedly quite successful financially.

When I take on these types of engagements, the understanding is that clients must give me complete access to the business including employees, clients, suppliers and above all they must understand that my agenda is to understand the guts of their business without any prejudice from the client. In other words, I want to uncover the problems on my own and not simply validate what they believe are the issues

After digging into the business, the problem became crystal-clear. The owner, although incredibly bright and successful, did not possess any of the qualities needed to interact with the employees, clients or even suppliers in the business. The prior owner drove a beat up pickup truck and would jump in whenever necessary and get his hands dirty at a job site. The new owner, although not afraid of hard work, came to the job sites in a Range Rover and while he was more than willing to dig dirt, the employees perceived him as an aristocrat. He had no experience in the business and it was hard for the employees to take orders from someone who had never done what he was asking them to do.

The new owner could not relate to the employees nor did he possess adequate knowledge to interact effectively with clients or prospects and so the business kept declining.

Although many business buyers acquire companies outside of their past experience and thrive, I have seen the situation described above far too often and it can be easily avoided. Beyond the fundamentals, valuation, and deal terms of any business for sale, buyers must consider whether or not their personality is suited to interact with the people they will encounter in the business. The owner of the landscaping business had spent his career dealing with highly educated and or technologically savvy individuals. He could relate to them easily. Not that he was a snob at all, but he could not present himself as being on the same level as a lower level employee. He simply could not relate to them and vice versa.

The lesson here is two-fold: simple: First, beyond the obvious issues to evaluate when buying a business, make sure that you will be able to command respect and effectively interact with the employees, clients and suppliers of any business your consider buying. Second, a new owner needs to get his hands dirty and understand how each part of the business works, what the employees do, and moreover, to spend the time actually doing the work. It is similar to what transpires on that new show Undercover Boss – it is simply amazing what the boss can learn by getting out of the office and onto the front line. With small business ownership, a buyer cannot hide behind layers of management. If you are not prepared to “dig dirt” rest assured the same dirt will be used to bury the business.

http://blog.bizquest.com/2010/10/one-major-mistake-people-make-when-buying-a-business.html#continued