Successful business owners are those who are always looking for new ways to expand and grow their business, and there are some tried-and-true techniques for doing so. One strategy is to buy another business – such as a competitor or a supplier.
Buying a supplier can be a successful growth tactic if they’re a critical part of your success. You’ll be able to stabilize your supply and have an opportunity to control any sales to other similar businesses.
Purchasing an established competitor enables you to grow your business overnight – while eliminating a rival that was eating into your market share.
Benefits of purchasing a supplier
If you’re a retailer, and you buy out your manufacturer, you’ve diversified your business and can engage in supplying other businesses. But there are several additional benefits to buying a supplier, such as:
- Lowered costs by eliminating the mark-up a supplier would add to the price.
- Quality control because if you own the supplier you’ve got more control over the quality of the products you sell.
- Improved logistics because you control the flow of information and products, so you can implement your own plans for distribution. You can fill orders faster, which means you avoid running out of supplies.
- Increased profits if the supplier is making an independent profit. Adding synergies and efficiencies could improve profits across both businesses.
If one of your suppliers comes up for sale, think about what the purchase of that business could mean for your company. If you can tick all the above, it’s probably going to be a wise and profitable investment.
Benefits of purchasing a competitor
Buying out a competitor has many benefits that go beyond eliminating them as a rival. You’ll open up new opportunities for business growth, such as:
- Increasing your market share locally, as you’ll add their customer base to yours. Maybe they have a significant customer you’ve always wanted.
- Enhancing your operational capacity, especially if your competitor has staff, machinery or expertise that can double or triple your output.
- Picking up their assets such as premises, specific stock, or machinery. It could be cheaper to buy a competitor’s second-hand equipment than to purchase brand new. They may even have a great location that you’ll benefit from when you buy them out.
- Increasing profits because in some businesses you can rationalize admin tasks or back-end support to lower overheads, warehouse space, or anything that’s duplicated. You might also be able to buy in larger quantities and get deeper discounts for both businesses.
In the end, purchasing a competitor has many potential benefits for your business, especially if they’re running a highly successful company. Their value can even extend into more efficient and less costly operations.
Determining their market value
Deciding on the market value for any business can be tricky – the amount you’re prepared to pay will be a combination of the business’s worth to you, and the approximate market value.
Many things could affect the value of the business. For instance, the current owner might have over-capitalized in certain areas or made poor investment decisions. They could include intangible assets in the sale, such as an exclusive license to sell certain products in a particular area, or have secured future orders that reduce your risk when buying the business.
To protect your finances and determine a fair price, you’ll need to know what the business is worth. To do this:
- Arrange a business valuation to determine a rough market price. Business brokers are experts in helping assess values. Ideally, find a broker with experience in your industry.
- Investigate the location of the business and any future plans for the area.
- Research likely future profits and risks.
- Investigate the company’s historical and projected earnings and cash flow.
- Review sales of similar businesses to determine the market value range.
Don’t be fazed by what the business made last year – you need to focus on the profit it’s capable of producing over the next ten years. Talking to a professional and exploring ways to mitigate potential risks will help give a clearer picture of how successful the business can be.
Conducting due diligence
As with any major purchase, doing your due diligence and conducting thorough research into your intended acquisition is essential. It’s important that you:
- Have a clear idea of how they make their money, so you know what kind of profits to expect. This is the kind of task you should undertake with your accountant or business advisor, as they’ll be able to pinpoint any flaws in the balance sheet.
- Understand their employee structure. Make sure you know which employees will be moving to you and which won’t, as well as how that affects your employee structure.
- Make sure their business culture is in line with yours. The more cohesive they are, the easier it is for the business to transition. If the business culture is vastly different, you may need to take some additional steps to make the transition smoother.
- Are confident that the purchase makes sense from a financial standpoint. While nothing is guaranteed, you should be reasonably sure that your business will benefit from the purchase. There are always risks, and you should be confident that they’re worth taking.
It’s also important to take your own capacity to manage the new business into account. You’ll need to decide if you’ll be managing the new business, or you’ll have someone managing it for you. Making sure you’re capable of managing the new supply aspect of your business is a key responsibility.
Next steps
Growing your business through acquisition can be highly effective. Doing so by buying a supplier means you’ll reduce costs, enjoy more control, and have the opportunity to sell to other businesses, giving you a competitive advantage. Purchasing a competitor can improve your profits, expand your market share, and provide you with additional capacity. Either way, it’s important to plan for the increased workload and be sure that you have the capacity and ability to handle it. It’s critical that your accountant and lawyer are involved throughout the process, as they’ll keep everything on track legally and financially.
