Achieve growth by buying another business

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 of them is to buy another business – such as a competitor or a supplier.

Buying a supplier can be a successful tactic to grow 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 other benefits to buying a supplier, such as:

• Lower costs – you’re eliminating the mark-up a supplier would add to the price.
• Quality control – if you own the supplier, you’ve got more control over the quality of the products you sell.
• Logistics – you control the management of 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.
• Increase profit – ideally the supplier is making an independent profit. Adding synergies and efficiencies could improve profit across both businesses.

If one of your suppliers comes up for sale, think about what the purchase of it could mean for your business. 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 and not just because you’ve eliminated them as a rival. You’ll open up new opportunities for business growth such as:

• Increasing your market share locally – it’s simple numbers, as you’ll add their customer base to yours. Maybe they have a significant customer you’ve always wanted.
• Boosting your operational capacity - your competitor might have staff, machinery or expertise that can double or triple your output – especially if you have a contract that needs filling.
• 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 – 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 increased discounts for both businesses.

What are they really worth?

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.

The current owner might have over-capitalized in certain areas or made poor investment decisions. They could include intangible assets, 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.

You obviously don’t want to pay more for the business than it’s worth. To avoid 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. If your business banks with us, we can help.
• Investigate the location of the business and any future plans for the area.
• Research likely future profits and risks.

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.

Steps to take

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 financials.
• Understand their employee structure. Will all of them be included in the purchase, and if so, are they happy to move to you? Are there key positions you intend to retain or eliminate?
• Make sure their business culture is in line with yours. Clashes over operation and management can be stressful, time consuming and expensive.
• Are you 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. Is it something you’re going to do yourself, or will you appoint a key employee to run it on your behalf? Making sure you’re capable of managing the new supply aspect of your business is a key responsibility.

Summary

Growing your business through acquisition is an effective method. Doing so by buying a supplier means you’ll reduce costs, enjoy more control, and can sell to other businesses, giving you a competitive advantage. It’s a challenging process, so 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 attorney are involved throughout the process as they’ll keep everything on track legally and financially.