- April 4, 2018
- Posted by: Rivero, Gordimer & Company
- Category: Business Advice
Building a successful company means finding a niche and repeatedly fulfilling a corresponding need in the marketplace. As you grow within an industry, you may eventually reach a point where it becomes difficult to gain any more market share through typical means. At this point, it may make sense to acquire another business.
A desire to grow your market share is just one of the many reasons for a business acquisition. Another reason to acquire a business might be the desire to enter a new market or fulfill a void in your business operations or offerings.
Amazon’s recent acquisition of Whole Foods is a good example of one company acquiring another business to fill a void.
When interviewed, Amazon’s CEO was steadfast in his justification of acquiring Whole Foods. He maintained that Whole Foods’ business philosophy and brand image aligned with Amazon’s and with the acquisition they could satisfy a need for their customers that was previously unfulfilled.
Regardless of your reason for considering a business acquisition, there are a few important questions to answer before moving forward as a prospective buyer.
Could your business satisfy the need without the acquisition?
Before you start investing too many resources into a business acquisition, ask yourself if your business could satisfy the need on its own. If the core competency of the business you intend to acquire is already present in your operations, can you simply invest internally to grow that department and improve efficiencies?
If the answer is yes, then it may be better to forego the acquisition and focus your efforts inward. However, if you cannot easily satisfy the need, then acquiring a business may be the easiest and most risk-averse route.
For instance, let’s say you operate an insurance company like Chubb Limited. You’ve positioned your brand around offering a high-end product and premium service. If suddenly you decided that you now want to target the low-income market, you may need to decide whether to invest into learning and growing a brand in that space or to acquire a company that has already done that work.
There will be implications regardless of the route you decide. For instance, if you try to build a subsidiary brand for the low-income audience, you could risk tarnishing your name in the premium service space.
On the other hand, you can acquire a business that already has clients and brand equity in that space, but you face the risk associated with transitioning management and merging business philosophies.
Before you acquire a business, you need to assess whether it is something you could accomplish internally, and at what expense.
Are you acquiring a company with a philosophy that matches yours?
Now, more than ever, with social media and consumer opinion at an all-time-high, any business move can find its way into the media. Therefore, it’s important to make sure any business acquisition you consider involves a company that has a similar business philosophy and shared ideologies with yours.
The moment your brand becomes associated with another, even during the negotiation and valuation stage, their history and decisions begin reflecting on your business.
For instance, Chipotle’s mission is to focus on responsibly-raised ingredients and locally sourced produce. This philosophy has helped Chipotle build their brand and profitability.
Chipotle might one day decide to acquire a distribution company to help streamline their supply chain. If they do not vet carefully, they could end up purchasing a company that does not share the same focus on sustainability. This oversight could result in a massive backlash by the media, undermining years of marketing and brand positioning.
Before you consider a business acquisition, research the history of the company and learn about the culture and philosophy of the business and its employees.
Why is the company for sale?
Sometimes you may approach an owner with an unsolicited offer to purchase his/her business. Other times, you may find businesses that are looking to be bought out.
In the case of the latter, it’s important to ask yourself why the owner is looking to sell.
If you’ve ever purchased a used car from someone, the best place to start is by asking why they are looking to sell. Maybe they need money, perhaps they just bought another car, or it could be that they are just interested in what they could get for the ride.
Based on their response and the way in which they supply the answer, you can glean a lot. This simple question can provide invaluable insight that can help during the due diligence stage and when negotiating.
Outside of the direct answer — you’ll also want to take a great deal of time analyzing the business. Look at the company’s sales, client churn, growth trends, and employee turnover to see if there are any glaring issues.
Most thriving businesses are not looking to sell, so it’s important to decipher whether the risks are worth the reward. During your due diligence, you’ll need to decide if the issues you find are fixable and whether you’re willing to invest the resources to make those adjustments.
You may discover that the business has been leaving revenue on the table because of resource limitations or mismanagement — with which you have an execution plan to resolve. However, you may find that the business has inflated earnings due to one large purchase order from a client that does not intend to renew.
Don’t neglect the “why” when it comes to business acquisition. You obviously have your reasons for acquiring a business, so do your best to understand why the business is comfortable being acquired.
When acquiring a business, there are subjective and objective factors to consider. Overlooking either side of the equation could lead to catastrophic results.
The three questions above are a great place to start if you’re considering a business acquisition. If you’d like to talk to an expert, then contact Rivero, Gordimer & Company, a Tampa CPA Firm with decades of experience and several certified public accountants ready to assist with your business valuation and acquisition.