- Acquisitions are not just for large businesses. Small businesses can use them to gain a competitive advantage over other companies.
- Acquisitions are used to expand the customer reach of a business and are generally much cheaper than growing through extensive and expensive marketing work.
- Mergers are used to make the business more comprehensive for its customers (i.e. finding new products to sell in order to gain more clients).
- Read this guide to triumph in small business mergers and acquisitions.
When large businesses engage in mergers and acquisitions, they do so because they want to gain a competitive advantage in areas such as:
- Acquiring new customers
- Finding new stuff to sell
- Reducing operating costs
Even if we small business owners do own new technology, the principle goals of garnering customers and satisfying them still need to be fulfilled.
So, do the rules of mergers and acquisitions change for small companies? And when should small to medium-sized businesses contemplate “buying a business?”
No, the rules don't change. Here is my guide to small business mergers and acquisitions:
A Real-Life Example of Small Business Acquisitions
Natalie, a small business owner, provided a very efficient service to a large enterprise. However, that client business represented 100% of Natalie’s turnover, and in terms of risk, Natalie’s own business could not be sold for value.
We tapped a few prospect businesses on the shoulder and invited them to consider selling. We found and bought a business for Natalie—and that purchase was strategically important because of the customer base.
Natalie’s business (selling the same stuff to significantly more customers) has grown beyond five times its original size in terms of turnover, and its market value has trebled.
So, we can see that Natalie's business value came from finding new people to sell to; she could have found new stuff to sell, but that was not the correct strategy for her to adopt.
When it comes to expanding your business, your first thought is likely along the lines of engaging marketing experts, spending big on web landing pages, and creating supply chain relationships. But realize there are cheaper alternatives regarding time, effort, risk, and dollars, in both the short-term and in the long run.
An Alternative Strategy for Business Acquisitions
One alternative strategy is to locate an enterprise which possesses links to those “people.” It will surprise many entrepreneurs out there, but the time-frame and cost of developing, implementing and managing marketing from a standing start could be much more expensive than bolting on a business that already exists and has access to the people you seek, as it was with Natalie’s business.
Perhaps you don’t own any material or intellectual property stemming from possessing a unique product or service. If so, your business is at risk. However, that “risk” can always be mitigated. Perhaps you could gain and protect the rights to use someone else’s intellectual property.
For example: Acquiring the specific rights in a geographic region such as a state or town; or for a function or use in a market or industry (that may be in the form of a franchise or licensed rights). And you should be thinking, “How can I extend or protect my reach?”
The strategy is the same—either get into improved marketing and branding or find the business that provides that reach. When it’s all about finding more people to sell to, there are more businesses out there doing it very successfully than there are marketing experts really capable of finding those very same people.
If you fail the possession or ownership test, perhaps an advantage to you could be producing that good or service in combination with something you do own: such as being a licensed or qualified technician and supplier.
Ownership of important resources can be sufficient to provide a competitive advantage, such as owning water rights or the inputs to a process (being the licensee of the recipe for the soft-drink coke or having the only manufacturing plant in town to make coke).
In this instance, it’s possible that a “buy or merger” strategy that provides both customers and resources can add value to your business.
Phil, a client in the building and construction industry, had a very good reputation with his clients. He saw an opportunity to “replace” a particular item both he, and those clients relied upon.
His innovation represented value to a good niche—and concerning how to turn it into dollars, it was easier to buy a small manufacturer than gear up himself. The strategy of “finding new stuff to sell” created for Phil the opportunity to grow significantly by supporting the clients (and the clients of the clients) that he already had.
Some Food for Thought
Finally, and unfortunately, the least valuable position for a business owner is an absence of any defendable ownership of either resources or product.
At this point, you must find a mix of resources owned by another that could be applied in your business (i.e. physical, reputational, organisational, financial, intellectual, and technological resources). They need to meet at least one or possibly all the following criteria: rare, hard to copy, non-substitutable, and valuable.
This is extremely important. In a clear example, the local sandwich van now driving around any industrial complex supplying morning teas and lunch can destroy the value of the business typically known as “the corner store.”
In this instance, any person can make a sandwich and buy a sausage roll for on-selling. Where the corner store used to possess a semblance of ownership via their unique location (a resource), the sandwich van who applied different resources carved out a job—at the expense of the shop-keeper.
In summary, when should a business think of growth through acquisition?
First, seek to establish what is supplying the impetus that creates value in the present business, then think of the time and cost involved in coming up with the reach it needs.
There are lots of businesses for sale that could do that.
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