Is business booming so much so that you’re in the position to hoover up another company?

If your name is Ruslan Kogan then the answer is obviously yes. This week brought the news that his eponymous online department store kogan.com had acquired the internet sales arm of collapsed competitor Dick Smith for an undisclosed sum.

Taking a leaf out of Kogan’s book can be one way for small business folk to expand their empires quickly, but there are pitfalls aplenty for the unwary.

Small business strategist Gavin Sequeira has some tips for taking over another enterprise successfully.

Set goals

What’s your business goal and will buying another company help you achieve it faster or more cheaply than growing your existing operation organically?

Make sure the answer to the latter is a resounding ‘yes’ before you start running the slide rule over potential takeover targets. Sequeira says: “Is it the best use of your cashflow or are there better ways to achieve the same goals?”

“You need to be confident this new venture will give you a positive return after you’ve serviced your debt and paid taxes.”

Due diligence

Is someone lining up to sue the business you’re set to acquire? Or is the lease on its premises set to expire, with no option for renewal? A rigorous due diligence process will ensure the profitable lemonade stall that’s been sold to you isn’t a super-sized lemon.

“Go through the financial records with an accountant to check cashflow and profits aren’t made up or doctored,” Sequeira says.

“Get good legal advice to ensure there’s no pending litigation and an independent valuation to check you’re not paying over the odds. And seek out some customer feedback so you have a feel for how the business has been operating and what you can do to improve it.”

“Go through the financial records with an accountant to check cashflow and profits aren’t made up or doctored.”

Return on investment

Twice the size but half the profit? Expanding shouldn’t be an end in itself; ensuring you receive an acceptable return on the cash you’re laying out is the name of the game.

“You need to be confident this new venture will give you a positive return after you’ve serviced your debt and paid taxes,” Sequeira says.

“Consider whether the business has large operating expenses or contingencies that might affect profitability and cashflow and look for ways where you can improve products and services to get a better yield.”

The folding stuff

Seller finance, angel investment, venture capital, bank loan, partnership…? The purchase process will be smoother if you’ve locked down how you’re going to pay for your acquisition before you start talking turkey.

“Weigh all your options with a financial adviser,” Sequeira says.

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