Strategic Acquisitions as a Business Growth Strategy
Acquiring Businesses That Are Complementary to Your Industry
In our last blog, we discussed the idea of tripling the size of your company through theacquisition of a competitor. We discussed 2 types of acquisitions. One type of deal would be the acquisition of a struggling company that you can simply takeover with little money exchange, so long as you can support the book of business, and so long as the owner of the target was willing to be retained as a salesperson or consultant so that the goodwill can be fully transferred to you.
The other type of deal was the acquisition of a company that is profitable and either your size or even bigger.This type of deal would enable you to raise money to complete the transaction, because of the prospects of what your company would look like in a lender or investor’s eyes if you were able to complete the transaction; in this case you could double or even triple the size of your business upon making the acquisition. In either case we were speaking about the acquisition of companies directly in your industry.
There is another type of acquisition that can explode a company’s growth and opportunities, that is an acquisition of a company that is not directly in the industry but rather a business that is in a space that is complimentary. We call these transactions strategic business acquisitions.
Strategic business acquisitions can include acquisitions of “complimentary” businesses. These businesses can sell products and services that may be similar to the acquirer and are sold to the same target market of the acquirers.
Acquisitions of these types of businesses would give the acquirer the ability to sell more products/services to its target market. It can also give the acquirer the opportunity to cross sell to the target’s customer base. Strategic business acquisitions can also include businesses that serve as suppliers in the acquirer’s industry.
When a business acquires a company that is a “supplier,” it gives that business the opportunity to sell a product/service at a greater profit since the target “supplier” is often supplying the product/service at a different cost basis.
Finally, a strategic business acquisition can include the acquisition of a business that is or can be a customer of the acquirer. These acquisitions make sense if the target’s profitability simply cannot be resisted or if the acquirer has the desire to sell to the target’s type of customers which could be buying the same products and services the acquirer sells at greater price points.
Example #1 – would be the office product company that buys a coffee distributor. This is an example of a company buying a “complimentary” business. Both of these companies target large corporate entities and small businesses that operate out of office spaces. The office product company can cross sell its products to the coffee company’s customers. It can also sell coffee products to its current customer base in addition to any revenues and profits it derives from the acquisition of the target.
Example #2 – would be if a chain of retail clothing stores buys a garment manufacturer that manufactures and distributes the same clothing items that the retail stores sell. This is an example of a company buying a supplier. This would enable the retail store to sell the products to the end user retail customers at greater profit margins since they no longer have to buy the goods at the wholesale level and essentially have the capability of creating the goods they buy at the manufacturing level.
Example #3 – would be a Produce Manufacturer/Distributor that operates a warehouse and 2 farms and decides to purchase a highly successful Fruits and Vegetables Retail Supermarket. This is an example of a company buying a potential customer. In this case, the Produce Manufacturer/Distributor will not only benefit from the target’s profitability and cash flow, but will be able to target end user consumers and sell produce items to these same consumers at higher price points.
Remember, strategic business acquisitions are purchases of companies that are not the same business type of your current business. Therefore, you as an owner may not be familiar with how to operate the target business type successfully. It is important to acquire a strategic fit that is profitable, especially if you don’t have experience operating the type of business the target is in. You don’t want to play turn-around specialist.
The purpose of the acquisition is to help your current company run more profitably. You also need to consider who is going to run the day to day operations of the target you buy. This is an important question to answer especially if you are the one that runs your current company. Perhaps the owner of the target can stay on in an executive role or someone in your current business is qualified to take on this role. Nevertheless, making strategic acquisitions is not for the meek and some of these questions must be answered before making a deal.
BizGro Partners, a business development firm, has over a decade of experience in helping small and medium sized companies successfully expand their business. If your company is looking to learn more about strategic business acquisitions, please contact us today to discuss how you can successfully grow your business.