Treat your Acquisition like a Brownfield

I had the opportunity to provide some advice to someone looking to purchase another business which he would then transform to fit his new business's needs.

While doing his due diligence I advised him to treat the new business and property like he was buying a brownfield. A brownfield is an industrial property that has been contaminated with hazardous waste or pollution.

Why would I want him to think of his property as a brownfield? This seems an odd way to look at a business. The reason is that nobody falls in love with a brownfield property. Many people who have bought contaminated properties have money off them. BUT... they had to buy them at the right price first. If they were bought for too much money, no profit was to be had.

To many people fall in love with the business they are acquiring and as a result they pay too much money for the land, inventory, machinery, customer lists, employees, etc. They incorrectly believe that all these assets are worth a lot because they are already in place when in fact the opposite can be true.

The land could be located too far from customers. The building could be outdated for new manufacturing techniques like lean manufacturing. The inventory could be overvalued compared to a liquidation value. Machinery was last updated in the 1970's. Customer lists could easily be purchased from another source and employees could be disgruntled from working in a declining business.

But, treat that business like a hazardous waste site and you will be more objective in your due diligence. Remember, there are many opportunities out there. The ones that will prosper will pick the ones that will have the best future return on investment (ROI).