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Showing posts with label Small Business Acquisitions - business m. Show all posts
Showing posts with label Small Business Acquisitions - business m. Show all posts

Wednesday, August 29, 2018

Small Business Acquisitions - business m

You might believe from the press that mergers and acquisitions are the realm of the big boys - mega-deals between blue chip companies brokered by top tier investment bankers earning stratospheric fees. And yet the truth is that much M&A takes place down in the real world occupied by small and medium sized companies using acquisitions to grow their businesses rather than take over the world.
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Why use acquisitions?
Most owner-managers have grown their business organically - setting up from scratch they have steadily built their business, reinvesting cashflow into growth. For many this remains a sound approach, but there are four situations in which buying another business can be more cost-effective and quicker than building it yourself.
Situation 1: Reduce local competition
We take it for granted as customers that competition is always a good thing. But it's not that simple. Local demand for the product or service you provide might be enough to support one business profitably, but not two. In the long term, you and your competitor could both go to the wall vying against each other, leaving customers with no local supplier. Buying your competitor allows you to service local demand and benefit from economies of scale, more of which below.
Situation 2: Gain economies of scale
These are the easiest acquisitions to justify because they're based on solid cost savings. Almost every businesses benefits from economies of scale. When you bring together two companies you need only one of every function, not two - one invoicing department, one warehouse, one sales administration team. Granted, each function might be bigger, but almost certainly not as big as the two companies needed separately. You also get better deals from suppliers because you're buying more as a single company.
Situation 3: Expand geographic coverage
Building a customer base in a new territory is expensive and risky. New salespeople can be difficult to manage when not under your direct supervision. New contracts bring additional costs, perhaps a new field service engineer whose costs won't be covered by low volumes of business in the early days. It can be less expensive, less risky and much faster to acquire an existing business like yours in another part of the country. You'll get the benefits of economies of scale too: even if you have to keep some local office functions, there will be duplicated costs you can take out.
Situation 4: Access new products
Customers will often tell a valued supplier how they wish they could buy such-and-such a product from you rather than their current supplier. Taking on more products gives you more to sell your current customer base, a much cheaper means of growing your business than finding new customers. Practical experience backed by academic research shows that the more products a customer buys from you, the less likely they are to go to a competitor. When taking on new products means taking on new skills like expensive technical people, or gaining access to new supply relationships, acquiring a business that already has these resources and the revenues to support them makes sense.
How to go about it
Unless you're very lucky and the perfect acquisition target comes along to your office one day and hands over the keys to their business, you'll need to work through four stages to make your acquisition succeed.


Identification: knowing which of the situations above is your reason to make an acquisition will help you figure out what kind of business you're looking for. After that, it's down to your industry knowledge, doing your homework and using your network.

Negotiation: it's not just about price, though of course that's important. A good lawyer and accountant will help you identify the potential pitfalls and gain protections against things going wrong.

Funding: unless you can pay out of retained earnings or cashflow, you'll have to go to the bank. A proper business plan is essential to show how buying this business will generate more than enough cash to pay back your loan.

Integrating: without proper preparation, this is where things go horribly wrong. Use the identification and negotiation stages to learn everything you can about the business so that you know exactly how you're going to bring the two companies together.
So what's stopping you?
Because of the risks of acquisitions, good advice on the practical issues - and not just the legal and financial technicalities - is essential for a first-time buyer. Find someone locally who's bought and integrated another company, who can guide you through the process. Done well, buying another business is a springboard to growth and the basis of many successful enterprises.