Business Acquisition by Foreign in Ukraine: Basic Errors
Business acquisition is a complex and long process that can confound even the most experienced businesspersons, because different business aspects, legal aspects, and human factors are important. The process of business acquisition in another country is of particular difficulty. This article describes the major errors / omissions in business acquisition in Ukraine, although, of course, such conclusions are correct for many other countries.
Error №1. Buying the wrong business. An abrupt change in the profile of the activities for the buyer may mean the absence of adequate and effective control. Bad idea is to buy a company with hard authoritarian management style by an owner with liberal ideas, or vice versa. In such cases, at least, initial fall in sales or resignation of previous staff or its part is inevitable, even a complete business stagnation is possible. Especially critical it can be if a person buys a business in Ukraine, which belonged to one owner, who was also the head, for a long time, because during that time the corporate culture in such an enterprise could take the most bizarre forms. In any way, an acquisition will be more profitable if the buyer is able to realize his skills, knowledge, interests, and connections in further work.
Error №2. Not knowing why the business is being sold. As a rule, a real lucrative business is sold in Ukraine extremely rare, because, even if an owner needs some money, he can always take out a loan for profitable business, and the stories about resignation may mean the presence of a strong competitor with whom an owner cannot fight. The general rule for Ukraine is that good is not for sale, therefore, it is necessary to be very careful to understand the real reason.
Error №3. Improper circumspection. It should be understood that a business that looks successful, and even makes profit, does not mean that there are no problems. As in Ukraine the role of networking, contacts, etc. is very high, it is possible that the entire success of a purchased business is because of the friendship of an owner with some major buyer (owner of the services), and it is not guaranteed that this basic buyer will want to allow a new owner to make money. Not less careful a person should be if a company in Ukraine has the bulk of income from working with government agencies or government orders. Such co-operation with the state often has roots of corruption, and as a consequence, does not meet the criteria of predictability for the future. Separately, a buyer should find out the state of accounts receivable and accounts payable, condition of basic funds, perhaps, a secret of big profits is that many large costs were simply put on a considerable time.
Error №4. The conclusion of contracts or agreements in your own name. In no way you should enter the agreements relating business, in your name, such as loan, lease, purchase of equipment, etc. It is much more reasonable to create a limited liability company or other legal entity form; in Ukraine, it is done quickly enough, it is easy and cheap. Do not expose your personal assets to risk of being lost due to business failures.
Error №5. Not promoting the business. Many people in Ukraine are making a mistake – buying a ready business, they think that the brand will work itself. I.e. they expect the return on investment immediately. However, in today’s market, this margin of safety is lost quickly, and to restore a previous position in the market is often more expensive than to keep it. So, do not skimp on the promotion (advertising, PR, introduction of modern technologies), bring fresh ideas that will increase your target audience. Even if a business has a stable base of regular customers, you need create a comprehensive advertising and marketing plan quickly.
Error №6. Ignoring the experience, history and the company’s image. Most businesses have formed their image and brand for many years. Customers in Ukraine tend to be more conservative than in Western countries, not always ready for rapid changes in their habits. The staff can be prepared for rapid changes not always as well, and a time it takes to train the old staff, or hiring new staff, can cost significant money and devastate the financial reserves. Therefore, if a buyer of business in Ukraine wants to start a fundamental restructuring immediately, it is possible that the creation of a business from scratch can be cheaper and more reasonable perspective.
Error №7. Revaluation of financial opportunities. This very private mistake when buying a business in Ukraine is that a buyer has some money for the purchase, but does have not any reserve funds for unexpected situations such as a fall in revenue at the first stage, or a need to carry out additional investments in the business. As practice shows, cash gaps can stop almost any business. Therefore, you should assess your financial capabilities in advance, not only in terms of the purchase itself, but also for further developments. Moreover, in any ways you should not take large sums in debt. If the purchase is so important, it makes sense to look for a companion for such a purchase, such companion will consider the purchase with an independent view and will be able to see those disadvantages, which have not been seen before.
Error №8. Ignoring working with a lawyer. Unlike other purchases, such as a house or car, buying a business you need to discuss many details relating to the acquisition, such as immovable and movable property, other assets, intellectual property, such as trademarks, receivables and payables, and so on. In addition, you should discuss a moment and reasons of the transfer of ownership, the procedure of payments, penalties for concealment of information, etc. Therefore, it would be appropriate to have a consultation of an experienced corporate lawyer, who knows not only the laws of Ukraine but also the specifics of business practices in Ukraine.
Error №9. Not knowing a value of the business. In Ukraine, only a small part of the selling companies have an independent assessment of their value. One of the reasons is that the official accounting of the enterprises can be easily manipulated by interested parties, and the value of such business assessments is often questionable. Buyers in Ukraine often rely on their intuition, especially working in the same field as the purchased business, and this approach is often more justified. However, this approach does not work if the buyer is a foreigner who is psychologically inclined to trust the numbers. Therefore, a foreign buyer of business in Ukraine should make a detailed financial analysis of the business to determine the appropriate price that will be paid. After that, it is necessary to consult some lawyers or persons with experience in the market to see if an evaluation of business realities is adequate, whether there are no unrecorded informal factors in evaluating that may make major adjustments in this assessment. Again, it may be more cost effective to start from scratch.
We hope that this article will help interested in doing business in Ukraine people, to determine their situation and decide what is better and more promising: to buy ready-made business, or build it from scratch.
Author: Kydalov Igor
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