One of the challenges that owners have is that they are not sure how to look for companies that they might want to purchase. I want to go over four types of companies to look at and the strategic rational for each.
The first and most obvious purchase is that of a competitor. The goal here being to be able to expand the customer base by the direct absorption of the competitor's customer base. There should be significant overlap in function, so there would seem to be the best chance for synergy savings. However, some attention to the demographics of the customers to ensure that the combined firm addresses an additive segment.
The second kind of acquisition is purchase of a company in an adjacent market. This will create a broader product and service offering. Many times buyers will prefer to do business with one firm instead of two. This lowers friction in the transaction and can simplify the business arrangement. This can be successful if the buyer for each different product or service is the same.
The third kind purchase is to purchase a vendor of the company. This is a form of vertical integration where the goal is to get more of the profit from a transaction. This makes the most sense if the vendor is used in a large portion of the sales of the buyer. The caution here is that if the vendor company does not sell to the general market it will change the economics of the company.
The fourth kind of acquisition is the purchase of a sales channel for the company. This is a different form of vertical integration where the purchaser is looking to lower the cost of sales for their product or service. Additionally, there is the possibility of locking competitors out of these sales channels. The issue will be whether the other sales relationships can be efficiently maintained.
All of these types of purchases can work and I have been involved with all of them in one way or another. The biggest issue is the mix of the strategic rational with a plan to execute the new business post acquisition. We will get to that over time.
Have a great day!
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