The Steps to Business Acquisition

Dec 2, 2009

In my 25 years as a business and marketing consultant in the automotive aftermarket, countless times clients have asked me, “Should I buy my competitor so I can grow my business?”There is no simple answer to this question. However, the opportunity to grow market share and increase margins and profits is even greater today, given the fragile financial position that many performance retailers find themselves in during the current economy.

Some reasons to consider buying a competitor include the following:

  • Expand Your Geographic Market

Expanding into new markets can be more expensive and time-consuming than buying a competitor. One of the biggest and most recent consolidations was the purchase of CSK by O’Reilly that was closed at the end of 2008.

With the acquisition of CSK, O’Reilly Auto Parts was able to add stores in markets in the West that could have required five to 10 years of new store growth. From the perspective of time and investment capital alone, O’Reilly was able to grow into a nationwide chain in a matter of months.

The same principle applies whether you are considering expansion within your immediate community, metro or regional markets. The metrics are based on the cost of opening a new store(s) as compared to the acquisition cost of acquiring a competitor. Factors include a study of inventory, store locations, physical store configuration, revenues, margins and profits.

  • Take Out a Competitor

A compelling reason to buy out a competitor is to eliminate price pressures, especially if the competitor is the low-priced leader in your market.

With the competitor no longer in business, customers will have one fewer store to shop, and the opportunity to market both branded and private-label products is improved.

  • Market Share + Reduced Costs = More Profits

Growing market share organically can be a lengthy process. The contrast may be growing 1-2 percent per year versus growing 30 percent in one year by buying a competitor.

The advantages can be significant, allowing you to negotiate better prices and terms with your suppliers, now that you have larger purchasing power. Increased margins will support, and could translate into, improved cash flow and more acquisitions.

  • Get Valuable Supplier Contracts

Sometimes your competitor may have valuable supplier relationships, one that you may have wanted and had not been able to obtain. These may be exclusive to your market or a certain category and may include direct imports as well as direct from U.S.-based suppliers.

These supplier contracts, when spread across the larger footprint you have achieved through targeted acquisitions, may generate substantial revenue at higher margins.

  • Add Coveted Locations

Have you ever coveted that particular street corner that is adjacent to a major shopping mall? It is the one that you drive by every day and say, “If only I had that store, I could increase my revenues by 30 percent.”

Sometimes those opportunities never come-unless you buy the store and convert it to your brand. Of course, you have to run the financials to ensure this is worthwhile and a good use of your human and financial capital. Once you believe it is, then it’s time to develop your acquisition strategy.

  • Acquire Intellectual Property

Intellectual property or trade secrets can be an unexplored gold mine if not fully exploited on the commercial market. At some point, someone will recognize the potential of the assets and have the resources to maximize their use; a potential scenario that could greatly affect market share.

Being able to acquire a company with valuable intellectual property assets, or proven trade secrets, is one way to improve your position in the market.

The Acquisition Strategy

Probably the most important step in buying a competing business is being prepared. What does being prepared mean? It means you have done your homework and created the background preparations so that when an opportunity becomes available, you are ready to go for it.

These steps include:

  • Business and Financial Statements are in Order

We have watched great opportunities fall apart when the buyer has not gotten its financial statements in order and procured an agreement from the local bank, or some other equity partner, before making a move to buy a competitor.

The acquisition process always drags the skeletons out of the closet for the target as well as yourself as the financial, legal and investment people become involved. If you are even just considering an acquisition, treat this transaction the same as you would a purchase of real property in today’s market by getting pre-approved credit.

The acquisition candidate will know you are serious and not only will you save a lot of time, you can often negotiate a better deal, especially when offering “all cash.”

Key elements include: keeping your tax returns and financial statements current, understanding the impact the acquisition will have on your cash flow, and getting the money needed for the acquisition pre-approved.

  • Future Think-Understand Current and Future Market Trends

An acquisition can turn into a financial debacle if you are not a visionary about the direction the markets or products are heading.

For companies in the performance truck sector, just think of the growth you would have experienced if you had predicted the explosion of this market 10-12 years ago. Conversely, if you had not foreseen the more recent decline of the performance truck market over the past 12-18 months, an acquisition in that sector could be putting your core business in jeopardy.

Another example of “Future Think” is the current economy, which has caught many performance retailers by surprise. A year ago, the OE replacement part market was crashing and the performance markets were booming. Today the opposite is true in many aftermarket niche sectors.

By paying attention to market trends, you can dramatically increase the return on your investment.

Understand Merger Risks and Rewards

While there are many different types of acquisitions to consider, one decision you need to make in advance is whether you seek a merger or an acquisition. The strategies are profoundly different.

In a typical merger, you are often creating a partnership with the company. A merger does not necessarily mean a “merger of equals.” The acquired company may become a minority owner in the new enterprise.

The role of the current owner may entitle them to decision-making power and grant some level of authority in the new entity. The entities may be combined into a new company, or the names may be merged together in some manner. Often the identity of the previous owner stays intact.

In a typical acquisition, on the other hand, you are acquiring the other company and the future of the previous owner is yours to negotiate. Often the owner stays on for a period of time as a consultant. In some cases, the owner may stay on to manage a division or even the entire company. In essence the identity of the previous owner, or company, disappears.

In either case, take a hard look at your nature and personality and decide how willing you are to share or give up control. And then base your acquisition strategy accordingly.

By using a merger and acquisition consultant to help guide you in this process, you have the opportunity to avoid many of the pitfalls that can occur during the M&A process.

I have observed successes and some failures. The failures have always been related to either a poor strategy, or poorly executed integration after the acquisition has closed and money has changed hands.