Acquiring a company sounds like a dream for many entrepreneurs.
This is especially true when you consider that instead of starting from scratch, you’re stepping into an established business, complete with customers, systems, and (hopefully) a profitable track record.
But before you dive in, you want to pause a moment and ask yourself what are the risks of acquiring a company.
As tempting as this deal feels to you, buying a business comes with its fair share of challenges.
In fact, some of these risks can be downright deal-breakers if not handled correctly.
And not being handled correctly is a reason why the majority of acquisitions - about 70% to 90% - fail as noted by the Harvard Business Review.
So, what are the risks of an acquisition, and how can you avoid them? Let’s discuss this in full detail below…
1. Hidden Liabilities and Debts
One of the biggest risks tied to acquiring a company is the possibility of inheriting unseen financial baggage.
This is a major risk that can really take a toll on the new owner—it can quickly drain your resources and put you at legal risk.
Just because a business looks profitable on paper doesn’t mean it’s 100% free of underlying debts, lawsuits, or unpaid taxes.
Some businesses may even have employee-related issues like unpaid wages or benefits.
These hidden liabilities can quickly turn what seemed like a good investment into a financial burden.
How to Avoid It: Due diligence is your best friend here. Go beyond the financial statements provided by the seller and conduct an independent audit.
You need to dig deep into the business’s financials, legal history, pending contracts, and tax records.
Request full disclosure of any ongoing or potential legal actions.
Don’t just trust what’s handed and said to you—bring in your own financial experts to comb through everything.
Ask the tough questions and look for inconsistencies. Get written assurances from the seller that no debts or legal issues exist.
2. Overestimating the Company’s Value
Overvaluation is another common mistake that occurs in the business acquisition process.
You can easily get caught up in the excitement of owning that business and overpay for it.
This is especially true if the seller is good at spinning a success story.
You might buy a company based on projected growth or inflated earnings, only to find that the actual performance doesn’t live up to expectations.
How to Avoid It: Stick to the numbers, and not the hype. Have a professional appraiser by your side to evaluate the business, and don’t rely solely on the seller’s financial projections.
Ensure that any projections you’re presented with are realistic and that you’re not overpaying based on potential future earnings.
We also advise you to negotiate a deal that includes contingencies.
For example, you can agree on an earn-out, where part of the payment depends on the business meeting certain performance milestones.
3. Cultural Misalignment
Culture is an often overlooked aspect of most business acquisitions.
Yes, you might buy a company with all good signals—including a strong brand and loyal customers.
However, if the company culture doesn’t align with your values, you could be in trouble.
Employees might resist the new ownership, or worse, leave in droves if they feel the culture shift isn’t in their favor.
How to Avoid It: Before you acquire that company, you’d want to spend time trying to understand its internal culture.
Visit the workplace, speak to the employees, and get a feel for how things operate day-to-day.
If the culture feels off, you need to decide whether you can adapt to it or if you’ll need to make significant changes. And consider how the changes might affect employee morale.
4. Declining Industry or Market Changes
A business may be thriving today but it could be part of an industry in decline.
Think about technological advancements or shifts in consumer behavior and how they affect businesses.
If the business you’re looking to buy falls victim to such, then you may be left with a company with a limited future.
A perfect example is a business operating in a once-thriving sector like DVD rentals or physical retail.
It may appear profitable on paper, but shifting consumer preferences or technological advancements can quickly erode demand.
Risks associated with acquisitions in these industries are usually huge, as you may end up owning a company that can’t adapt to the changing market.
How to Avoid It: You can avoid falling into such risks by conducting thorough research on the industry you’re getting into as a whole. Is it growing or shrinking?
Are there new competitors or technological advances that could disrupt the market in the near future?
You don’t just want to buy a business that’s profitable today—you want one that will be profitable five or ten years from now.
If the industry seems shaky, you may want to think twice before putting your money there.
5. Integration Challenges
Even if you find a business that screams it’s a good fit, there’s no guarantee that integrating it into your existing operations will be smooth sailing.
One of the risks related to acquisitions is that merging teams, systems, and processes can lead to inefficiencies, confusion, and even conflict.
This can be especially true if you’re acquiring a business while already running another company.
How to Avoid It: Have a detailed integration plan in place before you finalize the deal.
Think through how the business will fit with your current operations, what systems will need to be merged, and how you’ll communicate the transition to both employees and customers.
Having a clear roadmap will help minimize disruptions and keep everyone on the same page.
6. Legal and Regulatory Issues
When acquiring a business, you could unknowingly inherit legal or regulatory issues that weren’t apparent at first glance.
This can be anything from compliance with industry regulations to ongoing lawsuits.
Unfortunately, these are risks you wouldn’t want to take willingly as they can result in costly legal battles and fines.
How to Avoid It: Work with an experienced legal team that specializes in business acquisitions.
They’ll be able to flag potential regulatory or compliance issues before the deal is done.
Make sure that any ongoing legal matters are disclosed upfront and that you have a plan for how to handle them if you move forward with the acquisition.
7. The Emotional Toll: Stepping into Someone Else’s Shoes
Lastly, acquiring a business can also take an emotional toll on you (the new owner).
While the transition may appear smooth on the surface, stepping into someone else’s shoes can slap you with unexpected stress.
The previous owner likely poured years of effort, passion, and personal touches into the business.
As a new owner, there’s a fine balance between maintaining what made the business successful and making the necessary changes to steer it in your direction.
This emotional tightrope can easily create internal pressure.
Moreover, employees and clients may be attached to the previous owner’s way of operating, which can lead to resistance when you try to implement changes.
This can make it harder to establish your authority and build relationships.
Additionally, if the business had a family-oriented or personal atmosphere, you may feel a sense of responsibility to honor the past while pushing forward with your own vision.
How To Avoid: The trick here is to be prepared for the emotional complexity that comes with acquiring a business.
It’s not just about numbers and operations, but also about navigating the personal and emotional landscape that has been left behind.
Be emotionally resilient and have a clear plan for managing this transition. This can help ease the strain of taking over someone else’s creation.
Here’s How Building a Business From Scratch Can Be a Safer Bet
Given all these risks, building a business from scratch may start to seem more appealing.
While acquiring a company has its advantages, there are several other ways to minimize the risks involved in acquisitions.
Here are some top alternatives to consider:
1. Partner with industry experts
Before acquiring a business, consider partnering with experienced consultants or industry veterans who can guide you through the process. Their insight may help you avoid potential pitfalls, especially in due diligence.
2. Opt for franchising
For a middle ground between building and acquiring, franchising offers a structured, proven model while allowing you some level of ownership. This minimizes the risk of operational issues and gives you an established brand to work with.
If you want to build from scratch but don’t want to deal with the complexities, that’s where Trend Hijacking comes in. We offer a done-for-you automation program that handles every aspect of building, managing, and scaling a business on your behalf. From setting up operations to launching and marketing, we take care of the heavy lifting so you can focus on growing your new business.
Ready to take the leap without the stress? Reach out to us here for a free consultation, and let us help turn your business dreams into reality.
Final Thoughts
Acquiring a business can be a profitable move, but the risks of an acquisition are real.
From hidden debts to declining markets, overvaluation, and emotional baggage, the challenges can significantly impact the success of your new acquisition.
Being well-prepared and conducting thorough due diligence can help mitigate the risks associated with acquisitions.
If you'd prefer to avoid these risks and build a business from the ground up, we can help!
At Trend Hijacking, we handle everything from building and managing, to scaling your business with our automation program.
Book a free consultation call today and let’s get you started on the path to a successful business.
