Buying the competition Featured

9:57am EDT July 22, 2002

Mergers and takeovers happen every day, but don’t think because you are a small business you can’t jump into the game. Acquisition can be a good way to grow your business.

“I’ve seen companies with revenues as small as $5 to $6 million acquire other companies,” says Lloyd Bell, director of the corporate finance group for the Cleveland office of Meaden & Moore. “It can be done, and smaller companies often have untapped borrowing capacity. Because of the smaller dollar transactions involved, they may be able to squeeze funds out of their existing assets and those of the acquired company.”

  • Determine if buying the other company actually makes sense. “Oftentimes you can accomplish the same thing by investing in equipment and boosting your sales force,” says Bell. “When buying a company, you are usually buying capacity.” You may be able to ramp up your own capacity instead of going through a long financial transaction.

  • A company is more than machines. Remember that you will have more than just new machines to deal with. While the previous owner is probably out of the picture after the deal is complete, what about the rest of the management staff? The machine operators? Accounting? Think through what will be done with existing and additional staff. Also, don’t overlook details such as the location of the target business. Is it locked into an unfavorable lease or other contracts that could hamper your combined operations? If you’re not moving into one building, how will the staffs communicate with each other? Are the salary levels between the staffs comparable, or will adjustments need to be made? Is there a key person that might walk out the door and take their important knowledge about the business with them, reducing the value of the company?

  • Look for capacity, not complimentary products, in most cases. “As a small business, it’s better to buy a competitor with the same type of capacity than make a more vertical acquisition where you’re getting into something completely new,” notes Bell. “You have the core competency to manage a similar business. Once your base is a little larger, then you’ll be in a better position to look for something outside of that area.” If you run a service business, it’s usually better to look for new services to help diversify your offerings rather than increase the capacities of your core.

  • Be prepared for lengthy negotiations. “These things can drag on for quite some time,” says Bell. “The longest I’ve seen is two years of on-again, off-again negotiations.” Can you and your key staff members afford a commitment to meetings with attorneys, accountants and other advisers?

“If there’s a moral to the story, it’s be prepared to spend a lot of time and money,” says Bell. “But it is still a very viable way to achieve growth, as long as it is controlled.”