Next Meeting Topic
Introduction for meeting topic / prep:
This week, we have a special treat for you! It’s a double take on HOW to grow your business by buying another one, or ‘acquisition.’ Our two authors have contributed two very different articles – the first one, contributed by Ann Cooper-Smith of Q2 Ltd, helps us consider the many reasons behind why we may want to buy another business and the various ways it might help us accomplish the growth we’re looking for.
The second article, contributed by Serena Irving of JDW Chartered Accountants, focuses on her own experience and brings out the financial and other considerations we need to undertake in order to weigh up whether a particular business is a sound investment for us.
Is growing YOUR business by acquiring another business something you’ve ever considered?
To prepare for your 60-second introduction, open up your mind to ‘possibility thinking’ and read both articles (pour an extra cuppa!). Then, share with your group the TYPE of business you could potentially acquire (in a perfect world). Even if you would not consider actually doing it, it just might help your group members better understand how they can work collaboratively with you OR refer someone to you who could become a great strategic alliance!
Article 1 – Is Acquiring Another Business a Good Business Growth Strategy? By Ann Cooper-Smith
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 cost. 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 day care, 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/
Original blog here
Article 2 – Growing your Business Through Acquisition By Serena Irving, Director JDW Chartered Accountants Ltd.
Buying another business, in your industry or a related industry, can help you to scale up or grow your business quickly. You can reach a larger audience for your product or service, by tapping into the new customer base. You can take on new team members with experience and skills. You can acquire new technologies or consolidate systems which will make your whole operation more efficient.
I was made redundant just as I was preparing to work after my second daughter was born. A friend and I set up our own accounting firm, but we didn’t have many clients. We looked at acquiring other accounting firms or fee bases, but they weren’t a good fit to suit our values and our lifestyles. We bought into my current firm, and suddenly I had enough clients to pay myself a salary and time to build my networks for profit growth.
What to Look For
There are a lot of considerations when buying an existing business, some of which may be unfamiliar if you grew your existing business organically. Remember that you are buying the business as it is right now. If you are looking at growth potential, then also look at how long that growth will take and how much extra investment is needed to get there. Consider whether the investment will save you the effort of growing organically.
Take a look at the past three years’ profit and loss and balance sheet, ask questions of the owners. Spend time in the business, watch how the team operates, look at the layout and state of equipment and fittings. Review key contracts with customers, landlord, employees and suppliers.
Culture and Synergies
Is the new business compatible with your existing one? Can you run both? Merge them together? Or keep them separate and hire a manager for one of them?
What is the people culture like? Are they like us, with similar values and purpose? If the culture isn’t similar, then you may have several employee leaving before you can build a cohesive team.
What are the systems like? If you take the best system of both businesses, can you transition the other business smoothly? Can you make savings on administrative and management roles, without impacting on productivity and the customer experience? Can you provide a better end-to-end experience for your customers because of the business acquisition?
Businesses are often sold at a valuation, calculated as a numbers of years of expected profit (EBITDA, or earnings before interest, tax, depreciation and amortisation). If your industry uses a multiple of 3, that means that you will usually pay three times the cash profit, excluding finance costs and tax which may vary. Comparing EBITDA can be a bit tricky though, especially for family businesses, so take a closer look at the Profit and Loss report. Is the shareholder salary comparable to a ‘market’ salary for the work the person does? Are they putting through extra expenses for tax purposes like home office costs? Consider entertainment, travel, vehicle costs, donations which can be discretionary expenses. Are they paying a lower rent because the building belongs to family?
Don’t just look at sales as a number, but consider the lifetime value of customers. Are you going to get repeat sales from the customers? Also, look at the sales trend over time. Is the business declining or growing, and why? Are you buying a business or just buying wages for yourself?
Look at the strength of the balance sheet – especially the assets. Look at the quality of the stock. Look at the asset depreciation schedule and compare it to the equipment you see. Don’t buy any damaged equipment or expired stock. You usually won’t be taking over any liabilities of the business except for holiday pay, but make sure that your agreement reflects that.
If you are borrowing for the purchase, your bank will want to see cashflow forecasts. Can you predict what the next years’ cashflow is going to be like? What is the cost of funding the investment?
Review the key contracts of the business: with customers, landlord, employees and suppliers and consider your reliance on them. Imagine if you lost a major customer or supplier, your landlord decided not to transfer the lease to you, the store manager decided to move to a competitor. Do you have legal means to deal with this, or can you cope with the loss?
The exiting owner
Often the exiting owner will offer a work-in period, where they work paid or unpaid, to help you transition into the business. Whether you keep them on as an employee after that is your choice, but then you should agree appropriate duties, pay and conditions. Make sure the exiting owner signs a non-competition restraint of trade for a suitable period, set of activities and geographic location.
Buying another business can give your business a quick growth boost. Make sure the numbers stack up, that you have the time, resources and energy to combine your new business with your existing business. You need to take the time and effort to inspect your target business before you buy and evaluate whether it is a good investment. Consult with your accountant, banker and lawyer before you sign up to a business acquisition.
You can find out more about how Serena helps her clients by heading over to her website: https://www.jdw.co.nz/about_us/our_directors/serena_irving
Original blog here
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