We routinely see financial news headlines about multi-billion-dollar mergers and acquisitions involving huge corporations. But “acquisition” simply means buying a business in order to grow a business you already own. As such, it’s well proven as a growth strategy for small businesses as well, and it’s especially well suited to growing the portfolio of franchise owners who are able to exploit it.
What does small business acquisition look like?
In a small business setting, acquisition generally accomplishes one or both of these goals:
1. Purchasing one or more competitors to gain access to their customers, products, or services.
2. Purchasing an unrelated business to take advantage of its prime location and convert it into an extension of your own business.
While these kinds of acquisitions aren’t going to make headlines or transform entire industries, it still needs to be taken seriously and planned out strategically if it’s going to lead to successful growth.
Why is acquisition an excellent strategy for franchise owners?
By its very nature, franchise businesses are built for rapid growth under optimal conditions. Successful franchise owners have the following powerful benefits working in their favor, which can easily be exploited for growth by purchasing another existing business under the same franchise or converting a different acquired business into a new franchise location of their own:
- The success of your business is based on duplicatable systems.
- Assuming the geography makes sense, the franchisor should be behind your efforts to expand.
- Your existing team of employees can easily form a core of experienced team members in the new location.
- Your own experience should make running a carbon copy business easier than running something new.
Of course, every situation is different, so the best bet for a current franchise owner looking to expand is to test their idea against the common-sense guidelines below and consult with the parent company to ensure all the bases are covered before beginning a search for the next business.
When does it make sense to consider acquisition?
As a business owner, you’d be wise to consider acquiring another company if you can answer “yes” to at least one of the following questions:
1. Are you currently succeeding in a highly competitive marketplace where acquiring your competition would both increase your market share and decrease your competition?
2. Is your company outgrowing its physical location or market and does it have the capacity to grow further if a second location became available?
3. Is your current location busy and successful, but reliant on a highly localized customer base? (For instance, a car wash.)
The common denominator in these three situations is the fact that your current business is succeeding and realistically has room to grow. That’s an important point to keep in mind, because it’s not always the case.
When does it not make sense to pursue acquisition?
If your business is not currently running at full capacity, money is tight, or keeping up with current demand is a struggle for reasons other than space and location, you have changes that need to be made. But buying a second business is probably not the answer you’re looking for.
Acquiring a business involves a huge investment, even beyond the purchase price. It’s going to require additional time and energy, especially as the newly-acquired company’s employees and customers acclimate to whatever new culture, procedures, and expectations your company brought with it. It can be difficult, even under the best of conditions.
So, while acquisition should definitely be an option on the table in your efforts to grow your business, even franchise owners need to consider all the available options, including those that don’t force you to sink time, energy, and money into buying another company.
For example, testing new marketing opportunities, strategic hiring and employee development, or working to improve your product or service can be less expensive and more effective ways to accomplish your goals. Once the circumstances are more favorable, you can always explore acquisition as a growth strategy in the future.
If you’ve decided to grow via acquisition, what’s next?
If you’ve analyzed the situation and you’re confident that buying one or more companies is the best option for growing your business, the next steps are fairly simple.
It’s recommended that you bring together a team of experienced advisors to help you as you begin searching out the right business to buy, negotiating the deal, and then successfully managing the transition. This team should probably include a lawyer, accountant, business broker, and (in most cases) a commercial real estate agent, all of whom are familiar with your industry and the local business climate where you’re looking to buy.
With the help of this team of advisors, you can begin scouring both online and offline listings of franchise businesses for sale, narrowing down the selections based on the optimal criteria (i.e. location, industry, revenue) and based on your current business situation. If your acquisition strategy depends on buying out one or more of your competitors or a specific business location you have your eye on, you may need to contact the current business owner and propose the deal at a point where they’re not even thinking about selling, which has its own complications and nuances.
Your goal at this point is to take your time, do your due diligence, and make sure you’re not rushing into a subpar deal just to get the job done. Even if your current company is primed for growth via acquisition, acquiring another business that doesn’t fit well, or doesn’t offer enough positive return on your investment, can shatter those dreams of growth.
By handling the situation carefully, strategically, and patiently, you too can join the long list of small business owners who have enjoyed sustainable growth through acquisition.
About the Author:
Bruce Hakutizwi is the U.S. and international Business Manager for BusinessesForSale.com, one of the largest online global marketplaces for buying and selling businesses. Bruce is passionate about helping entrepreneurs succeed and regularly writes about small business management and growth. Connect @BizforSaleUS.