There’s no escaping the fact that buying a business is a costly endeavour, and it can also be a risky one. That’s why it’s so important to be on the lookout for hidden costs when you are going through the M&A process.
After all, if you are spending tens of thousands – possibly even millions – on a company, you don’t want to suddenly discover that you need to shell out even more!
To help you avoid any unexpected financial pitfalls when you embark on your M&A strategy, here are the top hidden costs you should be aware of when you are buying a business.
Pending legal costs
It can sometimes be difficult to know if a business is involved in a pending legal case, so it’s critically important that your legal team does thorough checks during the due diligence stage.
Failing to discover a legal case in the works could mean that you end up footing the bill for those legal costs, even though you had no part in the dispute. Depending on the nature of the case, your new purchase could also suffer in other ways, such as from a loss of reputation.
In short, buying a business with a pending legal case is incredibly high-risk and should be avoided at all costs. This is where the importance of thorough due diligence really comes into play.
Financial errors
Another aspect you will want to explore during due diligence is if the business owner has made any errors that could end up costing you money. These errors could have been purposely hidden from you – or the owner may not even have realised they made them. Either way, it’s important to check through your target’s financial history very carefully before proceeding with your acquisition.
Examine everything from their tax payments and VAT to how they have managed their payroll. It’s also a good idea to check for any business-related loans they may have, particularly if they have not paid them off in full.
The truth is that financial mistakes are relatively common in the UK business world, whether that involves mixing business and personal finances, failing to file tax returns on time, or underfunding vital areas of the business.
By making sure you keep an eye out for these frequently occurring mishaps, you can save yourself a potentially serious financial error of your own.
Recruitment costs
Sometimes buying a business involves the recruitment of new professionals, either during the acquisition process or after.
For instance, you may need to hire expert legal, financial, or specialist consultants to assist you with buying the business. Alternatively, once the deal is complete, you may need to hire new experienced staff to help you manage your new purchase, especially if several of its former employees left because of the sale.
Either way, the cost of recruiting (and, in some cases, training) these new employees can be significant, so it’s important to factor this into your financial decision-making as you eye up prospective acquisition targets.
The price of equipment
Sometimes, acquirers can end up purchasing a business with physical premises or assets – such as vital equipment – that have not been sufficiently maintained by the previous owner.
This can result in substantial bills for fixing up the premises, fixing up equipment and vehicles or possibly even having to buy or lease new ones.
Compliance costs
Compliance is a pressing issue for businesses of all shapes, sizes, and sectors.
Compliance ranges from appropriate management of customer data to having the correct licenses in place or following the right legal processes when it comes to certain regulated activities a business may be involved in.
This is where due diligence comes in again. It’s vitally important to ensure that the owner of the business you’re keen to acquire has been compliant in every way and that they haven’t concealed compliance issues from you, which could be costly to correct.
Promotional investment
Taking over a business also means taking over its marketing, and this can be an unforeseen cost, particularly if the previous owner hasn’t invested much in promotional materials.
These costs could involve hiring a team of marketing professionals to oversee social media, create physical advertising materials, or update the company website.
Failure to adequately promote your new venture could result in other unforeseen costs, such as lack of business or impaired growth.
How to buy a business without overpaying
Because acquiring an existing business can be such a pricey venture – even without those pesky hidden costs! – it may be a good idea to think about hiring expert help to guide you through the acquisition process.
This includes legal and financial experts, who can advise you on the best ways to navigate the M&A process while ensuring you tick all the right boxes and don’t purchase a business that could land you in legal or fiscal bother.
You may also want to think about hiring a business broker.
Why use a business broker, you may well ask. In short, business brokers specialise in M&A strategy and can assist you through every stage of your acquisition, from making first contact with a target to overseeing due diligence and helping you seal the deal.
Their knowledge and expertise can prove invaluable when it comes to highlighting potential problems with an acquisition, and they can offer nuanced advice on how to avoid those dreaded hidden costs.
Choose Harris Acquire for a hassle-free acquisition
Here at Harris Acquire, we provide a wealth of experience regarding all aspects of M&A. Our goal is to help both buyers and sellers experience a stress-free and seamless M&A process at every stage of the journey and achieve the best possible deal.
From scouting prospective targets to assisting with negotiations, due diligence, and more, we will be by your side every step of the way during your acquisition quest.
Keen to find out more? Give us a ring on 01926 757100 or send an email to Hello@harrisacquire.com.
