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Almost 72% of all companies are considered mature industry players. How do you tell if you are one? Here are some hints:
- There are no "new" customers, (i.e., not presently using a similar product or service). Each new customer must be convinced to switch to your product or service
- Reducing price seems like the only logical way to get new business
- Advertising, other than "On SALE", generates no new business
- It feels like you are constantly battling your salespeople to do more
Mature industries offer products and services their customers now view as commodities (i.e., in the eye of the customer, it's all the same; therefore the only differentiator amongst offerings is a lower price.) Consider the mortgage industry. Borrowers make mortgage decisions based on lowest rates, points and closing costs because they view "money" as a commodity.
When price becomes the determining factor, companies have reached maturity. They have lost their competitive advantage. It takes time and investment to renew a company's competitive advantage, but it can be done. In this article, we'll discuss another avenue that most mature business owners never consider as a growth strategy - Competitor Acquisition.
Before you stop reading any further, be assured this strategy can be a viable growth solution for almost any mature business - even if you are losing money!
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Why Does This Strategy Make Sense? |
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Purchasing a competitor is function of "Fit." The optimum acquisition is one that offers a synergistic product / service line that enables the acquirer to cross-sell across both customer bases. Secondarily, the acquisition should provide economies of scale or cost consolidation. Bringing two companies together and shedding duplicate expenses results in earlier profitability and potential pricing advantages. Best of all, this strategy typically increases the underlying value of the acquiring company by a factor of 2x or more. That's right; the post consolidation value of the acquiring company may be several times the original value of that company plus the cost to acquire the new! It's truly a win-win scenario.
Many successful acquisitions involve two direct competitors that sell the same product/service line(s) into the same industry. Here still is an opportunity to expand your customer base, take advantage of cost consolidation, improve profitability and utilize excess capacity.
Even companies that are ineligible to borrow from a bank "as is" will find lenders beating a path to their door to finance an acquisition for the same reasons stated above!
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An Example |
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Take two similar size companies and see how this dynamic works. For simplicity sake, assume they are direct competitors manufacturing a similar item.
Company A manufactures widgets and has revenues of $6 million and 55% unused capacity. It is losing $100,000 annually. Let's assume its salable value is presently $1.5 million based on net asset value.
Company A
Revenue = $6,000,000
Expenses = ($6,100,000)
Profit (Loss) = ($100,000)
Company B
Revenue = $6,500,000
Expenses = ($6,440,000)
Profit (Loss) = ($60,000)
Assume Company A acquires Company B for $1 million. After the acquisition, Company A moves 30% of Company B's equipment into A's facility and also assumes 25% of Company B's labor into Company A's facility. This move results in a net overhead cost reduction of $1,200,000 (expenses paid by Company B last year that are saved after combining operations), plus new costs of $130,000 in moving and set-up costs and $165,000 in financing costs to pay for the acquisition.
Combined Companies A and B
Combined Revenue = $12,500,000
Operating Expenses = ($11,340,000) Note 1
Financing Costs = ($165,000) Note 2
Moving and set-up = ($130,000) Note 3
Profit = $865,000
Note 1: Combined operating expenses reduced by $1,200,000 due to savings of rent, utilities, insurance and 75% of B's duplicate labor.
Note 2: Financing costs to pay for acquisition of Company B
Note 3: Moving and set-up costs for equipment, fixtures and furniture (one time expense)
Company A's bottom line has changed from a loss of ($100,000) to a profit $865,000 - including the cost of financing the purchase and equipment relocation expenses. Company A paid $1 million for Company B and the Salable Value of Company A has been increased by over $2.2 million - a net increase in value of over $1,000,000.
Also, since only 30% of Company B's equipment was needed post-acquisition; the other 70% was liquidated for $400,000 in cash immediately providing new working capital!
Competitor acquisition can be viable growth and performance strategy for almost any mature company and the results are almost instantaneous as compared to other options.
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Coming In The Next Issue |
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Don't miss the next issue of Exit for Success.
When Should I Implement an Exit Strategy?
Use the link below to read previously published issues.
BizMACH is an association of highly skilled consultants, evaluation experts and merger and acquisition specialists. We take ordinary companies and create extraordinary value. Best of all, we only work with lower mid-market companies.
Competitive advantage is the key to revitalizing your company's growth and profitability. Call us if you'd like a free consultation and to learn how BizMACH can grow your company and increase its value.
When you work with BizMACH, you're using the BEST®.
Business Evaluation and Salability Tool
Tom Long
Solid Oak Consulting, LLC
522 South Elmwood Ave
Oak Park, IL 60304
708-524-0886
telong@solidoakconsulting.com
Tom Long is an Associate Accredited by the
Institute for Independent Business International
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