Assessing the health of a business isn’t all that different from assessing the health of a person. At an annual exam, the doctor assesses the patient and determines what things they are doing right (“Bravo on keeping up with that exercise program!”), what medical risks they may face, and changes they can make to do even better.
For a business, a SWOT analysis essentially performs the same function. Business owners considering selling or buying another business can benefit from doing a SWOT analysis.
SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. A SWOT analysis is an exercise where a business is evaluated on those four factors. Strengths might include elements like a highly experienced management team, a favorable cash flow situation, or a proprietary product or service that competitors do not have. Weaknesses are honest representations of where the business could improve, such as high staff turnover, higher than desirable debt, or too much reliance on a single source of revenue.
Opportunities represent areas in which the business can grow. They would include items such as a new product or service line, the anticipated sale of a competitor’s business, or the chance to bring on team members with in-demand skills. Threats are factors that are outside the control of the business that could undermine its strength, like cyberattacks, natural disasters, or the possibility of new competitors entering the market.
For owners planning to sell their business, a SWOT analysis can identify areas to work on before formally putting the company on the market. It can also highlight the positive aspects of the business that should be shared with potential buyers. In addition, it can serve as part of the calculus of negotiating a sale price for the business.
For those looking to buy a business, a SWOT analysis can help in two ways: First, performing a SWOT analysis on the target business helps potential buyers get a clearer picture of the company and its value. Second, doing a SWOT analysis on the buyer’s own business can help determine if it is healthy enough to take on the debt and management responsibilities associated with an acquisition.
A SWOT analysis isn’t a one-and-done project. It reflects the health and challenges of the business at a point in time. Ownership and management should make the SWOT analysis part of the company’s strategic plan and should update it regularly. If the business or its market undergoes significant changes, the SWOT should be changed to reflect those new realities.
A SWOT analysis is also an important piece of information to share with potential lenders. They will want to have as clear a picture as possible of the health of the business and any threats it may be facing. Those threats won’t necessarily derail a loan application, but they should be disclosed in good faith by potential borrowers. Lenders will want to see what the ownership and management see as the strong points of the business, so a SWOT analysis is a good vehicle for showcasing those features.
Remember, a SWOT analysis is supposed to be an all-inclusive, good-and-bad document, not a smoke and mirrors piece to show a business in its best light. It’s a tool for planning, bridging gaps and making changes. It should have input from people from all over the company so that a true picture emerges.
The final document may end up being written by one or two designated people, but many team members should be part of the process of gathering information. Some firms may collect feedback via anonymous employee surveys. Others may hold group sessions to discuss the various elements of the analysis. Whatever format a company uses, it’s important that voices from across the firm are heard.
Some companies choose to hire an outside consultant to prepare their SWOT analysis. They may feel that team members would be more open with their opinions with an outsider rather than a higher-up in the company. Similarly, consultants may be more comfortable asking potentially sensitive questions than team managers would be.
Bringing in a facilitator can also make sense from a workflow perspective. They can focus 100% of their time and energy on the SWOT project, and team members can continue their usual work with limited interruption.
Before venturing into a merger, acquisition, or sale, a business owner needs to have an honest appraisal of their company. A well-prepared SWOT analysis provides that clarity. Providers of business acquisition loans will expect a clear picture of the health of the target business as well as that of the purchasing company.
Oak Street Funding has a long history of providing loans for acquisitions and expansion. It’s never too early to start talking to a lender about plans for your business, so if you see opportunities for growth in your future, feel free to contact us about how to get started.