5 Reasons Your Company Should Consider Growth by Acquisition

Building any company by increasing sales organically, one customer at a time, can be a lengthy process. In contrast, acquiring a competitor can sometimes present a more efficient way to build your revenues, profit and market share. Here are five signs it may be time for you to consider an acquisition:

1. If you want to expand geographically, acquiring a similar business in the new location may be less risky than starting from scratch in a new area. If you have high customer acquisition costs, it may be more efficient to buy a company with a strong base of clients than to hire your own sales and marketing team. If you need certain capabilities or assets that are particularly hard to obtain, such as a team of experienced employees, a high-traffic retail location, or even a great URL, buying a business that already has what you need may be easier and cheaper than developing the assets yourself.

2. If your business is not operating at one hundred percent capacity, buying a competing business may help provide the additional sales volume to fully use your existing resources, allowing you to increase revenue without significantly increasing fixed costs. For this type of strategy to be successful, it’s important that you identify any areas of overlap between the seller’s business and your existing business, and develop a plan to eliminate the overlap.

If you have excess capacity in a manufacturing facility, purchasing a competitor’s business or client list may provide an opportunity to more fully utilize your plant—assuming the seller’s manufacturing operations can be moved into your existing plant. If you currently import products from overseas, but don’t have sufficient sales volume to fill an entire container, an acquisition could help you add volume to fill each container and negotiate better prices. If you run a service-based business and your employees are not always busy, buying a competitor’s client lists could provide a solution to add volume to ensure your employees are fully utilized.

3. Acquiring and successfully integrating a competitor can be a strong step towards preparing your own company for a future sale. As a general rule, a larger business is easier to sell than a smaller business, and as the size of your business increases, the value of the business will also increase. Buyers are generally much more interested in (and will pay more for) businesses that are growing than those that have hit a plateau in sales. Implementing a successful acquisition can also demonstrate to potential buyers that you have built a capable management team and efficient organization.

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4. An acquisition may provide an attractive return on investment. If you’re fortunate to have a solid balance sheet and excess cash in your business, investing to acquire a company in an industry you already know may provide an attractive ROI. As a back-of-the-envelope guide, the reciprocal of the multiple you pay to acquire the business will be your rate of return, assuming the acquired business continues to generate the same amount of income and no additional investment is required.

For example, if you agree to acquire a small competitor for a cash purchase price that is three times the company’s historical annual earnings, the implication is that you would expect to earn an annual return of 1/3, or 33 percent, if the business continues to generate the same income as under the previous owner. However, if you believe you can improve profitability of the seller’s business, by realizing synergies with your existing business, because the seller mismanaged the business, or because you anticipate industry growth, the projected return could be higher. If you’re able to leverage the transaction, with bank or seller financing, the return could also be higher. Of course, you also have to weigh upside return potential against the risk that the business might not continue to generate the historical earnings the seller experienced.

5. It may be a good time to buy. In today’s economy, it’s possible that you may be approached by a troubled competitor interested in a sale as an alternative to shutting down. If you understand exactly why the competitor has experienced problems, and feel that you have the capabilities, experience, and risk tolerance to turn the business around, you may have an opportunity to buy at a very attractive price. Alternatively, you may be able to acquire certain tangible or intangible assets of the business, such as equipment, patents or trademarks, a lease, a telephone number, or even the client lists, without having to buy the entire business. However, if the competitor is already in bankruptcy, or could be headed towards bankruptcy, be sure to consult with a bankruptcy attorney. 

While buying any business can present a variety of challenges, a successful acquisition may provide an effective shortcut to fast, profitable growth of your own business. 

This article is part of NY Report's Accelerate 2012 series. To read more, click here.