Acquisitions can provide the most rapid route to growth in volume. For this reason, family businesses may buy out competitors or diversify operations and customer base through targeted acquisitions.
In well-managed companies, the typical result of a sudden large increase in volume is an immediate increase in bottom-line profits due to economies of scale. Conversely, when a company is struggling with internal controls and does not have operations that run like clockwork, the sudden extra volume tends to exponentially multiply existing problems. When this happens, the acquisition can become an operational nightmare.
When analyzing your next potential acquisition, consider the following:
Brands and Contracts – If the reason you want to buy out a competitor is to get hold of a new brand or contract, be sure you will actually be able to obtain that brand or contract. Too often, owners think a brand affiliation is automatic with a buy out. In fact, most brand contracts contain first right of refusal language that can preclude a purchasing company from obtaining the brand.
Customer Quality – Particularly in more rural locations, consider the cost to serve the new customers you are receiving in the acquisition. Are the deliveries complicated and expensive? Are the new customers slow-pay deadbeats with lots of potential bad debt write-offs? Will your company be perceived as the “big-guys” that won’t feel it if they don’t pay in a timely fashion or at all?
Customer Retention – After you take over, how many customers will take their business elsewhere? If customers do leave, what percentage would need to stay with you for the deal to still be profitable?
Customer Diversification – Taking on a new class of customers may present special challenges. For example, you may have expertise in commercial accounts, but not a clue about the mentality and needs of a consumer.
Cash Flow – For wholesalers, after the initial down payment for a purchase, ongoing cash needs can be a large burden. Be sure the cost to carry receivables and extra inventory is factored into your buying decision.
Real Estate/Equipment – Particularly for retail operations, site location and condition are vital to success. Many retail store buyouts require taking on undesirable sites to obtain the winners. What will be your strategy with the low-performers? If the current owner could have sold just those sites, wouldn’t they be gone already? If your strategy includes selling those sites, what makes you think you can sell them at a profit?
Also, watch for large future maintenance and repair expenses at new locations. When an owner knows he will be selling out, he often defers repairs and maintenance to save cash. This can spell big expenses later for the new owner.
Technology – Check for compatibility with your existing systems of the technology you will be buying. Will their cardreaders, scanners, POS, etc. integrate with your existing systems? If not, how will you handle the new information? If the technology is outdated, what will it take to bring it up to your standards? And finally, can your accounting systems, telephone systems, etc. handle the new load from the buyout?
Employees and Culture – Every company has its own culture. Think of company culture as the unwritten rules of the game. The culture at your company is what drives most customer service decisions. Would the new company’s employees make the same types of decisions as your existing staff? If not, can they be trained or do you need to replace the staff. If you replace staff, what will this do to customer retention?
Operations – This may be the biggest bullet. What impact will the acquisition have on your operations and are your people and systems prepared to handle the load? Do some soul searching regarding the weak points of your present operations.
For instance, if you are having problems with inventory control and accuracy, adding more sites before you get a reliable inventory system in place would be foolish. In operations, the moral to the story is attempt to get your own house in reasonable order before you start acquiring more sites.
Growth through acquisition can be profitable, adding stature and clout to your business. To be sure your acquisitions are profitable, however, do your homework — both on your current operations and the new business you are considering for purchase.
