Buy Your Competitor?

The purchase of another company in your field can be a quick way to expand, but you have to proceed with due diligence

A challenging business climate might not put expansion on the top of your priority list, but there may be some good reasons for you to think about growing the business now – or as the economy bounces back.

You could start the ball rolling by investing in new equipment with an eye to moving into a new territory next to the communities where you already do business. Or you could redouble your efforts to grab more market share where you already operate.

But if you’re contemplating growth, there’s another option: Buy out a competitor. 

Buying another shop in the same line as yours, whether down the street or in the next town or county over, can be a quick way to enlarge your operations, and your bottom line. To be sure, there are pitfalls – some financial, others in the tricky area of emotions.

They don’t have to stop you, though, as long as you’re careful. Like any major decision, buying a competitor can entail risk. But it also can pay off handsomely.

Whom to buy

One obvious prospective target business is one in which the owner is getting ready to retire and looking to cash out. That kind of deal is likely to be low-key and comfortable for both parties.

Don’t expect to pay a fire-sale price, though. If there’s no real urgency, your seller will hold out for the best offer he or she can get. After all, the proceeds from the deal may be funding a retirement, or perhaps a trust fund for children or grandchildren. Those will be powerful motivations to try and win a few extra dollars at the negotiating table.

Another prospect could be a struggling business. You might get a pretty good deal here, but you’ll have to be careful. The operation you purchase might be having trouble because of poor practices, and if you take it over, you’ll need to restore its reputation.

The quickest solution then will be to let the older business brand disappear and replace it with your own, assuming you’ve built a strong reputation over the years. But you should probably consider building into your cost calculations what it will take to launch an advertising campaign that helps your new operation stand apart from the poorly run one you’re taking over.

Sometimes good matches can be made between a pair of thriving companies. In that case, you’re not so much buying out a competitor as potentially getting “married” to him or her. If the competing owner plans to stay on, you’ll need to take time getting to know that person to make sure the two of you are compatible.

When to buy

The time to buy is closely tied to whom you’re going to buy, of course. If your competitor is retiring, the answer of when is elementary. If failing, the same. Beyond that, the decision of when will depend on other factors: Can you get financing? Is the price good (perhaps because of tough economic times)? And are you ready to take on the new responsibility of a bigger business? Every deal is different, but in essence there are three ways to buy a company.

Just buy the customer list. That’s the cheapest route, and if that’s all your seller has to offer, it probably means the business itself is on its last legs anyway.

Buy the assets – equipment and customers. Again, that’s much cheaper than buying the business itself, and for that reason, the owner may be very interested in those terms. Look at it this way: If you sold your house, which way would you get more? Selling a working, intact home? Or tearing out the floorboards, shingles, wiring, carpet and fixtures and auctioning them off individually?

Buy the entire business. This is the most common way to buy a business. It’s especially good for you as the buyer if you can find ways to capitalize on the firm’s great reputation and goodwill. But this approach also means evaluating the purchase with extra care. Are there debts that will become yours? Any lawsuits you’re buying your way into? Other liabilities you’re taking over? Will you have to honor existing labor contracts?

What stands in the way?

Potential obstacles to a buyout include the reputation of the firm you’re buying, the sort of liabilities it has, and whether you will have a business relationship with the seller after the deal is finished.

Financing is another hurdle. If you’re buying a healthy business with good cash flow and a robust bottom line, you may be able to use its future profits to help finance the deal. But credit markets have become much more cautious. Be prepared to answer tough questions before your banker writes you a loan.

Get professional help

Of course, any deal as big as buying another business shouldn’t go without close scrutiny by a team of advisers: an accountant, a lawyer and a business valuation expert. Yes, these services will add to the total transaction cost, but the money is well spent if it helps you make a deal that will work in the long run or helps you avoid a major mistake.

There’s no one way to grow your business, and perhaps you’re more suited to an incremental approach that expands bit by bit on your strengths. But if you find an opportunity to expand by buying out a competitor, take a good look. It might just be the door to new challenges – and new accomplishments.


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