If you already own a business you will know first-hand the associated rewards and challenges.
A business may grow quickly, but then stall or plateau when starved of sufficient capital or resources. Acquiring or merging with another business can help break through the plateau, allowing further business growth and expansion.
This article will explore some of the valid reasons for acquiring or merging with another business.
Scale by leveraging existing systems and resources
Scaling is a way of designing your business so you can generate revenue growth without adding a lot of extra cost. If you have a business model with well designed systems and processes, then buying another business with an established clientele allows profitable expansion by leveraging existing systems, processes, or strategic points of difference.
Typically, software and e-commerce businesses are easier to scale as the cost of adding new customers is small, since the internet provides the means through which the business acquires and services new customers.
Diversification by offering a different product or service
Another valid reason for acquiring a business is diversification. Ideally you would acquire a business offering a different product or service that you could offer to your existing customers and target market.
For example, a weight loss business could diversify into the exercise industry, or a healthy food delivery business offering those new options to its existing customers.
Gain a Greater Market Share
To increase market share typically you would look to acquire a business offering similar products and services to your existing ones. You can then reduce duplication costs by leveraging existing operational staff, systems, distribution networks, suppliers etc. By eliminating duplication the business becomes more efficient and profitable.
Increasing market share provides a competitive advantage by allowing better prices, or other terms and conditions, from suppliers by increasing buying power.
Sufficient scale can reduce operational costs through investment in machinery or technology; reduce warehousing and distribution costs by investing in your own warehouse, logistics or distribution systems; or even invest in your own offshore operational or support staff in a lower cost country.
Cross Selling for Synergy
A business can create synergy by combining products or markets, such as when one business cross-sells products of another business to increase revenues. For example, mortgage brokers and insurance brokers often cross sell, there may be synergy between a mechanic and a car painting business, or between a consultancy business and an accounting firm.
New Niche Offerings
A niche market is a segment of a larger market defined by its own specific needs, preferences, or identity that makes it different from the market at large.
For example, pet owners are a larger market, dog owners are a subset of that market, while a specific breed or type of dog is a specific niche market.
An offering to dog owners could be doggie day care, dog walking services, personalised leashes or accessories, dog grooming, or special dog food. If your business targets dog owners then adding a new product or serve offering could be an effective growth strategy.
When is the Best Time?
The best time to merge with or acquire another business is when your existing business is doing well financially, with great staff and systems. You should have the human and financial capital available to research, plan and finance the acquisition, carefully go through the due diligence process, and invest the time and energy to bed down the new acquisition.
All while keeping your existing business humming along.
What are the Risks?
Many Q2 clients have successfully bought a second or third business. It can be an excellent growth strategy. But a business merger or acquisition also adds complexity and costs, and the owner may neglect their existing business. The risks of a new acquisition can be high, and can lead to business failure.
A successful acquisition or merger takes time, energy, capital, skills, and finesse. The process and risk should not be underestimated, while the upside can be significant and rewarding.
Not everyone needs or wants to create a larger business. Most NZ businesses are small to medium family businesses, which can be very successful, satisfying, and small by design.