Tips for buying a competitor business

For an SME business owner, the offer to purchase a competitor business can seem irresistible. While acquiring a competitor can increase your market share and accelerate your growth, it is essential that the purchase is handled in the correct way to ensure the decision does not stunt your future growth or harm your existing business.

Business deal

1. A competitor lists their business for sale, but should you buy it?

When a competitor lists their business for sale, you may at first feel an overwhelming sense of achievement as your business has seemingly come out on top against a rival. However, you quickly face a tough decision: should you buy the competitor business?

There are many benefits to purchasing a competitor brand, including…

Leverage

As you will establish a greater market share, you may gain more leverage with manufacturers and distributors as you have more purchasing power. This may help you to negotiate better deals and increase your profit margins.

Price control

Purchasing a competitor business may also enable you to increase your pricing as you will no longer be competing for customer attention and can charge a greater price as your product or service will be in more demand.

Gain key locations

Buying a competitor can sometimes be a much quicker and easier way to expand into new locations.

New suppliers/contracts

Buying a competitor can also allow you to gain valuable contracts which may have been out of your reach or simply inaccessible before.

Nevertheless, there are also important considerations you must make in order to ensure purchasing the competitor company is the right choice for you. Questions you should ask yourself include…

Can you streamline your operations?

You need to carefully consider whether or not you will be able to streamline your competitor's operations with your own business model. Running two separate business models will be time-consuming and resource-intensive, and will most likely increase your overheads.

What will the business offer you?

Think about what the competitor brand is able to offer that you currently don’t have. This may be better storage facilities or a well-established brand reputation, for example. Consider these factors and think about whether your company will benefit from them in the long term. Buying a rival business simply because you can shouldn't be the driving factor here.

What additional expenses will you take on?

With the purchase of a company, you may take on expenses your business does not currently have to account for. For example, if your competitor has an in-house delivery team rather than outsourcing their delivery needs to a third party, you will have to consider the additional costs of new employees, including employee insurance and expenses such as holiday and sick pay.

Business team

2. Maintaining two separate brands vs merging under one brand identity

If you have considered the benefits and limitations of purchasing a competitor's business and have decided purchasing the business is the right choice for you, you will next be faced with the decision of whether to maintain two separate brands or merge into one brand identity. Let's look at each more option closely.

Absorb your competitor

Once you acquire a competitor, the common expectation is that one of the two brands will be absorbed by the other. This can be achieved with minimum loss of customers and profit if you and your competitor have similar business models.

Retiring the weakest brand post-acquisition usually allows business costs, such as manufacturing and distribution costs, to be lowered, as you remove duplicate expenses and can focus on maximising profits.

Absorbing your competitor will be the right option if you want to minimise competition, improve efficiency, grow your customer base, join a new market and/or increase business intelligence. However, there are some hurdles you need to take into consideration too, including culture clashes, job losses and greater liability.

Maintain two separate brands

Retiring one brand can result in lost customers and profit, even if the retired brand is weak. The lost profit may outweigh the cost savings achieved by retiring the brand. If this is likely, you are better off maintaining both brands.

It is not uncommon for an acquirer to maintain both brands, at least for a transition period. During that time, a strategy can be put in place to migrate customers to one of the brands so that the other can eventually be retired with minimum loss of profit. It is unlikely that you will want to maintain two separate brands for the long-term as many of your expenses, such as distribution and property costs, will grow and your budget will be spent inefficiently on duplicate costs.

Create a new brand

In some instances, the acquisition of a competitor may require you to create an entirely new brand identity. This can make sense when neither your brand nor that of your acquired competitor is strong in the market place. It may also be appropriate when there is a need to create a new brand to better express the strategy, values, and vision of the combined unit.

Should you choose to create an entirely new brand, however, you must remember that any loyalty customers associated with either brand may be lost, so you must feel confident that a new brand will have the resources and capabilities to build a strong, loyal customer base.

Brand discussion

3. Other dos and don’ts

Do move with caution

Purchasing a company can seem like a fairly straightforward concept, but it can be filled with unforeseen roadblocks. For example, letting go of employees during the acquisition can create a negative brand image and lower employee morale, harming the efficiency and reputation of your company.

Do communicate with customers

As soon as possible after completing the acquisition, you should communicate with your customers the value proposition you plan to offer them as a combined organisation. This should be done no matter how short or long the timeline will be before you fully merge the two companies together.

Don't let your ego get in the way

It can be hard to resist purchasing a rival business, but it should not be done if purchasing the business or its resources wont have long-term and highly beneficial outcomes. For example, if a competitor is based in another state and combining and running both businesses will be a logistical nightmare, you may wish to consider rejecting a sale offer.

Conclusion

The proposal to buy a competitor is a significant strategic move. It can be one of the largest investments you will ever make, so that investment should be carefully planned and executed. Its aim should be to create value, not simply generate growth for the acquirer.

Looking to grow your business through acquisition? Contact me to find out how I can help.

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Hello

I’m Mark Vischschoonmaker

An insightful, reliable and unflappable Sydney business coach.

I’m an award-winning, global top-10 business coach and mentor who specialises in helping business owners gain more structure, profits and sanity in their business life.

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