If you already own a business you will know first-hand the associated rewards and challenges.
A business may grow quickly but then stall or plateau when starved of sufficient capital or resources. Acquiring or merging with another business can help break through the plateau, allowing further business growth and expansion.
This article will explore some of the many valid reasons for acquiring or merging with another business.
Scaling is a way of designing your business so you can generate revenue growth without adding a lot of extra costs. If you have a business model with well-designed systems and processes, then buying another business with an established clientele allows you to expand profitably by leveraging your existing systems, processes, and strategic points of difference.
For example, if you own an early childcare centre with excellent systems and many points of difference you may be able to acquire poorly run centres cheaply, and then quickly improve both their profitability and capital values.
Typically, software and e-commerce businesses are easier to scale as the cost of adding new customers is small since the internet provides the means through which the business acquires and services new customers.
Another valid reason for acquiring a business is diversification. Ideally, you would acquire a business offering a different product or service that you could offer to your existing target market.
For example, a weight loss business could diversify into the exercise industry, or a healthy food delivery business and offer those new options to its existing customers.
Greater Market Share
Increasing market share provides a competitive advantage, and can position a business to obtain better prices from suppliers by increasing buying power. A greater market share may allow a business to invest in innovation, marketing, and systems which in turn makes it harder for smaller businesses to compete.
To increase market share typically you would look to acquire a business offering similar products and services to your existing ones, and then reduce duplication costs by leveraging existing operational staff, systems, distribution networks, suppliers etc.
By eliminating duplication the business becomes more efficient and profitable, and the increased profits can be reinvested back into the business to further grow market share and/or acquire another business.
A business can also create synergy by combining products or markets, such as when one business cross-sells products of another business to increase revenues. For example, mortgage brokers and insurance brokers often cross sell, there may be synergy between a mechanic and a car painting business, or between a consultancy business and an accounting firm.
When you increase sales volume you can often improve gross margins. For example, if you significantly increase purchases from a particular supplier you are likely to be able to negotiate improved pricing, or other terms and conditions.
If you have sufficient volume then you may be able to reduce operational costs by investment in machinery or technology; reduce the costs of separate warehousing and distribution by investing in your own warehouse, logistics or distribution systems; or even invest in your own offshore operational or support staff in a lower cost country such as the Philippines.
New Niche Offerings
A niche market is a segment of a larger market defined by its own specific needs, preferences, or identity that makes it different from the market at large. For example, pet owners are a larger market, and dog owners are a smaller niche of that market.
A niche offering to dog owners could be doggie daycare, dog walking services, personalised leashes or accessories, dog grooming, or special dog food. If your business targets dog owners, then adding a new niche offering could be an effective growth strategy.
When is the Best Time?
The best time to merge with or acquire another business is when your existing business is doing well financially, with great staff and systems. You should have the human and financial capital available to research the market, plan and finance the acquisition, carefully go through the due diligence process, and then invest the time and energy to bed down the new acquisition.
All while keeping your existing business humming along.
What are the Risks?
I am an experienced chartered accountant and many of my clients have successfully bought a second or third business. It can be an excellent growth strategy. But a business merger or acquisition also adds complexity and costs and may cause the owner to take their focus off their existing business.
The risks of getting it wrong can be high and can ultimately lead to the failure of both businesses.
A successful acquisition or merger takes time, energy, capital, skills, and finesse. The process and risk should not be underestimated, while the upside can be significant and rewarding.
Not everyone needs or wants to create a larger business. Most NZ businesses are small to medium family businesses, which can be very successful, satisfying, and small by design.
Learn more about how Ann Cooper-Smith helps her clients here: http://q2.net.nz/