Wednesday, December 4, 2013

Buying a Business to Expand an Existing Business

A strategic buyer is one who is buying a business to expand an existing business to increase their competitive advantage. These buyers have a history of appearing to be smarter than the vendors. That is a big statement but think about this: strategic buyers come to the table already knowing a big part about your business models and business realities. They typically have a business or businesses operating in a similar market sector as you do. Even before they come to the table they know the clients, the priorities, the competitors, the pricing, the future risks, the upside potential and the down side risks.

Even if they don’t manage to close a deal with you they will have learned information about your business model that will eventually make their business model better. This means you have to develop a clear strategy about how you might respond to information you provide to your competitor.  Maintaining a careful balance between disclosures for a transaction verses competitive intelligence can be a significantly complicated. Have advisor acting in your best interest. It is the advisor's job to know what and when to share information.

Another influence is strategic buyers have the ability to acquire your competitor if you’re not interested in selling or if a workable deal can’t be struck. As the business owner that risk should be contemplated before full disclosures. (We will elaborate on this in a future post.)

Strategic buyers will have a good idea what your business is generally worth but more importantly are willing to invest time and resources to confirm what your business is “worth to them”. A private buyer and the “buying a job” buyer typically don’t have synergies and leveraging the way a strategic buyer will.   

Simple synergies to increase profitability in the same market place: the buyer can consolidate both operations into one facility, combine accounting and administration, consolidate purchasing for discounts and volume pricing, optimize client lists and leverage relationships, reassign staffing for better utilization and eliminate duplication. Net margins can literally double. Between the economics and the expanded access to clients/sales this buyer is able to provide you with significant upside.

The million dollar question is how will future earnings/ROI be driven by the strategic buyer‘s business strategy? Developing an understanding of how the strategic buyer will benefit can be a critical influence in managing the negotiations and structuring the deal, which will generate the best outcome for you.