Acquiring Your Competitor

When it is more costly to grow your customer base organically than it is to acquire, why not consider acquisition?

What is the cost, in your business – in your industry, of generating a customer or a base of revenue? If you have the ability to make this assessment you will be able to realize when and if you should explore acquiring a competitor. And if you are thinking of selling, this information will better enable a buyer prospect to assess the possibility of acquiring your business.

Typically, by virtue of “scale”, as the number of customers (or revenue dollars) increases, the cost per customer (or revenue dollar) decreases. As you start a business you have huge costs of marketing, branding, development, capitalization, overhead, etc. in addition to the ongoing costs of operations. As the business evolves and fixed costs are covered, there become fewer and fewer costs associated with generating income.

When two similar companies are blended together there is often an opportunity to reduce duplicated costs (such as facilities, marketing, administrative, new equipment, etc.), resulting in increased profit margins. Additionally, the hidden costs of accumulating customers one by one, over time, can be less identifiable than the one-time acquisition of a customer base. This is nicely coined in the oft-repeated adage, “half of our advertising budget is wasted. If I only knew which half.” Maybe it’s better to acquire customers at a known cost.

There are numerous influential factors to consider when acquiring a competitor. Some of the questions to pose are:

  • The price and terms of the acquisition will directly affect return on invested capital and cash flow. Do you have the capital in place to successfully complete a transaction and maintain the levels of working capital needed to operate the business and still get a reasonable return?
  • How much of the customer (or revenue) base, is it reasonable to believe, will be lost during the ownership transition? What measures can be taken to minimize attrition?
  • How similar is the customer (revenue) base to yours? Are the pricing structures similar?
  • Is the share of the market you are acquiring going to enhance your overall market presence? Or will it open a new market for you that would be costly to do from scratch?
  • Will the acquisition create added value by bringing product architectures or technology infrastructures (a platform) to your business? Or will it bring products or technologies to your existing platform?
  • Will scaling your company to the next size level create higher valuation multiples for you in the event you decide to sell?

For the growth minded or those with an eye on an exit, the business sale/acquisition is often a viable alternative.