Vasu Majumdar, Senior Advisor in our Corporate Finance team here at Fortus shares the dos and don'ts of a solid ...
5 reasons to buy a competitor business
11 March 2020
For an SME business owner, the opportunity to grow by acquiring a competitor can accelerate the differentiation of your business from the rest of the market.
While many businesses grow organically, as a business owner you’ll recognise that this may hinder the speed of growth, and in a fast moving market it’s possible to become marginalised.
In addition, buying a competitor business may have other advantages.
Reduce cost & increase profits
If you buy one of your competitors, you could create synergies between both businesses. You can potentially gain leverage for better prices and terms with suppliers because you have more purchasing power.
Gaining market share on acquisition may also enable you to increase your pricing. Buying a competitor can often eliminate some of the price pressure you currently face and you can often command a better price for the same amount of product or service than you were obtaining previously.
There is also the opportunity to reduce duplicated ‘in-house’ costs such as finance, insurance and property costs.
Secure valuable contracts
Buying a competitor could allow you to gain valuable contracts for your own business to supply to, but you may also obtain some valuable supplier contracts that weren’t previously available to you.
Not only that, you can get your team to counteract with their team. Often creating competitive forces, within the teams may drive productivity improvements.
Gain key locations & expand geographically
Buying a competitor may be a much simpler and quicker way to expand into further key locations. It could allow you to grow geographically in months, rather than in years through organic growth.
Sends a strong message to market
Acquiring a competitor means you can get a stronger market presence, and, in many cases, it can put your competition on the back foot. In our experience, when a company buys another company in the same sector, the message and news spreads around their marketplace very quickly. This sends out a positive sign that your company is well funded, successful and you’re ambitious and proactive.
Acquire to retire
Many business owners we support are thinking about how they are going to exit their business. If the business is too small, you may not be large enough to attract a good quality purchaser. Also, if your management team is too weak, you won’t have the infrastructure to construct a management buy-out.
Acquiring another business can therefore give you more scale to make your business increasingly attractive to a good quality buyer. It will also allow you to build a stronger management team giving you the opportunity for a management buy-out later down the line.
Scaling up through acquisition, may give you far more exit and succession options in the future. So, in many cases we advise clients that they’re ‘better to acquire to retire’.
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