Business owners looking to grow their business have three approaches available to them. They can look at organic growth, which Investopedia classifies as “increasing output and enhancing sales internally.” They can look at margin expansion, which is using technologies or other process improvements to become more efficient at servicing their current customer base. But by far the fastest way to grow a business is to buy another business.
When Does Buying a Business Make Sense
There are three reasons why a business buys another business. And those are:
- To fill a strategic need,
- To build density in an existing geography or territory, or
- To expand the geography that you cover
Filling a Strategic Need
Is a lack of expertise preventing you from providing a customer with the full experience you envision? Are you spending too much money outsourcing a part of your business or working with consultants? Would adding new talent and expertise allow you to distance yourself from your competitors?
Then acquiring a business has some benefits for you. One, it significantly decreases the ramp up time to bring on the new services. You could hire an individual or a team, but that still requires them to build from the ground up. And everyone knows how easy it is to hire (note: italics used to indicate sarcasm).
Two, those services come with their own revenue stream. Meaning, the costs of the new capabilities are partially or fully offset by the revenue they are already generating.
Building Density in an Existing Geography
This is the classic example of adding customers through acquisition, and it is probably the first thing that comes to mind whenever you consider buying a business. This works best when either your staff has additional capacity or there are economies of scale that you can recognize through the acquisition. Let’s look at an example.
Let’s say that your company provides marketing services, and your team consists of two 2-person marketing team, a project manager, a graphic artist, and a sales representative. And your company is acquiring another company that does the same thing. You may want to bring over the marketing teams from the acquired company, but you may not need an addition project manager or graphic artist – so you let them go. You’ll now be able to support the same number of clients with less combined personnel allowing you to achieve higher revenue margins.
In Annapolis, our two local community banks, Severn Bank and Shore United, have recently merged. Their main stated goal of the merger, the build density in their existing geography to better compete with the national brands.
Businesses, especially in the Annapolis region, are built on talent but grow on reputation. However, that reputation takes time to build up. If you are looking to expand not nearby territory, you could painstakingly grow your reputation the same way you did it the first time, or, you could look to acquire.
Again, in this instance you’ll be looking to capture economies of scale – however, this time, the playbook is a bit different. When you are building density, you are looking to acquire capacity as much as anything. When you are expanding geography, you are looking to acquire sales and reputation.
Using the same example above, in this scenario you’re more likely to keep the Project Manager and Sales staff since they are customer facing than you are the marketing talents.
Challenges to Consider
There are a few questions you will want to ask before finalizing a purchase, including:
- How will the purchase be financed?
- Do I have a plan to integrate the new entity into my corporate hierarchy?
- How does this add to my long-term vision for the company?
- Do I have the skills and connections needed to pull off the acquisition?
Financing the Purchase
Interest rates have been really low for awhile now. In a lot of ways, it still makes sense to finance a purchase as much as possible. Yes, like buying a house, a down payment is still necessary. And yes it does take longer to close the deal. However, it hurts the revenue reserves much less and the interest on the loan is what we brokers call an “add back” – meaning it does not negatively effect the value of your business if you are considering selling soon.
Integrating the New Entity into the Corporate Hierarchy
Private Equity firms have generic “integration playbooks” identified for these situations. If this is your first time, you may be starting from scratch. That’s OK! Below is a set of questions to help you get started on formulating your integration plan.
- After the resulting acquisition, will both companies remain two separate entities or will your business pull the second business in?
- How many of the ownership team, management team, and staff stick around after the merger?
- How many do you absolutely need to make the acquisition work?
- What does your retention offer look like for Key Personnel?
- From an HR perspective, does the benefits of both companies match up? Where do they differ?
- Are the technologies employed by both firms compatible?
- Are there any red flags with the current contracts with suppliers and customers look like?
- Are there supplier overlaps?
- Are there customer overlaps?
- Are there any cultural differences between the two companies that could lead to difficulties down the road?
Obviously, the point is not to identify questions or challenges, but to identify solutions for each of the above, and we are happy to assist if you have any questions along the way.
Long Term Vision of the Company
Every leader has a different vision for their company. What is yours? And most importantly, how does this acquisition address one or more gaps in that vision?
Are you looking for additional revenue? Are you looking to expand your customer experience or grow your footprint locally, nationally, or internationally? Are you looking to fend off competition? Are you looking to maximize how much you can sell your business for?
All are valid reasons to purchase a company. But all can slightly tweak the type of acquisition you are looking for.
The Skills and Connections to Pull Off the Acquisition
At a minimum, you will need lawyers to draft the paperwork and an accounting firm to evaluate any acquisition. Now, neither of those two are qualified to help you understand how to integrate the new company or how it aligns to your long-term vision for the company.
Because of their jobs, accountants and lawyers are naturally well networked. So they may be able to help you if you were to ask for help say, getting a loan. However, neither of them are qualified to help you get the right loan. Nor are they required to understand the benefits of an SBA loan to a traditional loans from a local community branch. They are unlikely to be aware of companies such as Benetrends who can help you role off your IRA funding tax and penalty free. Or have partners such as RBC Wealth Management who can help you borrow against other investments using their Credit Access Line.
For that, you should consider bringing in an outside analyst or advisor.
Transworld Business Advisors of Annapolis
Transworld Business Advisors is the world’s largest business brokerage franchise. We have over 250 office locations around the globe; including 8 in Maryland and one in Annapolis. In our over 40 years of supporting business owners, we have conducted tens of thousands of business transactions, including over 6,300 since 2014 alone, across dozens of industry verticals.
We separate ourselves from our competitors in two keyways. One, we are local. While other business brokers focus either nationally, regionally, or at the State level, our franchise owners focus on a local territory. And often, we live in the territories we service. This allows us to better know the local players and to have a better understanding of our customers pain points. This also allows us to be more responsive and to have face to face conversations when Zoom won’t cut it.
Two, while our focus is local, our reach is international. We use technology to connect all our agents, sellers, and buyers. Meaning, if any agent in any office has already identified the right acquisition opportunity for you, you
opportunity for you, you’ll be alerted immediately. Our agents can also help you determine if a business is appropriately priced by comparing it to other deals in our network based on industry and size.
For more information about a specific opportunity, or to learn more about if we are a good fit to work together, please contact our Annapolis office or schedule a time at your convenience to sit down with one of our brokers.