Very few business owners hope that things will stay the same for their company year after year. For most owners, the goal is to grow a business, either by moving into new markets or offering new products or services.
But in some cases, growth can be difficult, as several obstacles can get in the way, such as competition from similar businesses, the cost of doing market research, and difficulties finding the right people to employ. One way to work around the challenges of growing a company is to acquire an existing business. There are a few times when buying another business makes the most sense.
You’re Looking to Move Into a New Market
One reason business owners often consider buying other businesses is to expand into a previously untapped market. A company might consider buying a business that offers a similar product or service but in a different geographic area. Or, a company might consider buying another business that offers a product similar to its own. In the latter case, acquiring a business wouldn’t only increase market share, it would also help to reduce competition.
You Want to Diversify What Your Business Offers
Another reason to consider buying another business is that you want to expand your company’s product offerings. For example, a hardware company might purchase a software company or a company that makes laptops might purchase a company that produces computer chips. If a company buys a business that produces a product or component the business needs to produce its own products, it’s known as vertical integration.
Buying the company that produces the materials your own needs to make its products can mean that it costs less for your business to manufacture its products. But it can also mean that your business ends up selling parts and components to your primary business’ competitors.
You Want to Improve Your Management Structure
In some instances, one company might buy another not because of the products or market share of the acquired company but because the company has a management structure or leadership that the purchasing company envies. If your own business has struggled with management or has had other internal staffing issues, acquiring a company that has an excellent track record can be a benefit to you.
It is worth pointing out that there are cases when differing management approaches cause culture clash when two businesses come together or when business A buys business B. Although you might envy the way business B operates, it’s important to keep the needs of your existing employees in mind as you work to integrate the two companies.
You Want to Reduce Costs
Buying a business can be a cost-cutting move in some cases. For example, if you end up buying a company that produces a key component of your own product, you no longer have to buy that product at wholesale prices. Buying an existing business can also minimize redundancies and allow you to streamline workflow and responsibilities.
You Have the Time for Due Diligence
One thing to consider before you decide to buy a company is whether your team has the time to do the research and due diligence needed to make sure the company is a good fit and that you’re getting a good value. When you purchase a company, the acquisition should make financial sense and it should also make strategic sense. That’s to say, you don’t want to buy a company for the sake of buying a company. Instead, you want to consider how the purchase will help your company on its path to growth.
When it comes to financial concerns, one thing to think about is whether the acquired business will help improve your bottom line. It’s not enough to look at the current revenue and income of the potential acquisition. You also want to look to the future to see whether that business is likely to continue to have the sales and income it has now or if there’s likely to be a drop-off.
Prepare for a Successful Acquisition
Buying another business isn’t something you want to attempt on your own. New Direction Capital offers virtual Chief Financial Officer services to help your company determine whether or not acquiring a business is the right next step for you and to help your company through every stage of the process. Contact us today to learn more.