The COVID-19 pandemic has led to major uncertainty among business owners. During times of economic uncertainty, such as the 2008 Global Financial Crisis, companies that have been involved in more acquisitions were more likely to generate higher returns for their owners. If you are a business owner, now may be the time to consider a strategic acquisition that will compliment your existing business and further increase your wealth.
Buying an existing business can be a great way to avoid the up-front costs, initial marketing, training, and start-up losses associated with starting a new business from scratch. You may also be able to inherit pre-negotiated contracts with existing suppliers and avoid buying new equipment that is needed to operate the business.
Buying an existing business can also be faster, since the initial waiting period for permits, agreements, contracts, and other aspects of a business start-up have already been taken care of by the founder. Finally, it can be safer to buy an existing business with an established client base and proven positive cash flow as opposed to starting a new business and spending months or even years building your business towards profitability.
Consider these are three types of transactions that your business can take advantage of using a growth by acquisition strategy:
Acquiring the Competition
The major benefit of this type of transaction is that it allows your business to gain market share quickly. By purchasing a direct competitor, you will have access to their employees, their brand, and their customer list immediately. By successfully integrating the two businesses, it is possible to realize significant cost savings and improve profit margins.
A business that undergoes vertical integration acquires a company that operates in the production process of the same industry. Some of the reasons why businesses choose to integrate vertically include strengthening their supply chain, reducing production costs, capturing upstream or downstream profits, or accessing new distribution channels. To do this, one business acquires another that is either before or after it in the supply chain process. This strategy is important for many businesses for several reasons. Not only does it increase profits from the newly acquired operations by selling its products directly to consumers, it also guarantees efficiencies in the production process, and cuts down on delays in delivery and transportation.
In this type of acquisition, a business purchases another business that operates in the same industry but a different line of business. They may share a similar customer base or target demographic, but do not compete with each other. Typically, this type of acquisition is successful when the related businesses are synergistic, and their values are enhanced by these synergies.
Acquiring an existing business can be a long and complicated process. If you are thinking about expanding your business through an acquisition, it is highly recommended that you work with a business broker who can walk you through the purchase process. You should also involve your other trusted advisors such as your lawyer and accountant early, as they will help you through the process as well.
To learn more about buying a business, download our free e-book here.