0045 - Want Faster Growth? Buy a Competitor Instead of Starting From Scratch

I talk a lot about buying a business as a way to get into business for yourself, instead of starting from scratch. But what if you already have a business? No matter how big it is, sometimes buying an existing business, another existing business can be a great way to grow your already existing business. Today I'm going to get into some of the pros and cons of growth through acquisition.

Stick around. Welcome to Business Buying for Financial Independence. I'm Tim Delaney, and I help young professionals buy small businesses so they can escape the 9 to 5 and take control of their time, income, and future. If that sounds like you, hit the subscribe button and let's get into it.

So today we're going to talk about some of the pros and cons of buying another existing business. and cons of buying another existing business. So this is for somebody that already has a business that's up and running. So this is for somebody that already has a business that's up and running.

Or maybe they're just starting it from scratch. And then they want to buy another business to help grow their business. This is something I've spoken to people actually recently about - if you're starting a business, you might have a very niche idea and you like your industry, but it can be a slow path to growth. And there might not be a ready supply of businesses in that specific area for you to go by.

But there might be industry adjacent businesses for you to go acquire. I talked to Tijera Wright in a recent episode who started a charcuterie board business where she makes her charcuterie boards, but she also does corporate events and just fun events to teach people how to do that. One of the things that I had suggested to her was, instead of slowly trying to build that business up from scratch, which she has done a great job of, could she find, I mean, to start with another charcuterie board business, but those are kind of few and far between.

And a lot of them are solopreneurs anyway, where you're not acquiring a big business. But could she go find a cheese shop or a deli for sale that she could add her charcuterie business onto - But also have that steady supply of customers. Steady, steady revenue coming in. The refrigeration needed for for scaling that type of business, The refrigeration needed for for scaling that type of business, discounts with vendors, because now she's buying in larger quantities.

So that's an avenue of growing an existing business. Same thing applies if you've had a business for 5, 10, 15, 20 years. Are there opportunities out there for you to grow your business through acquiring another similar or industry adjacent business? So let's start with some of the pros of doing it like this.

For starters, you can exponentially grow your business. The top line revenue and gross profit by making an acquisition. If you're doing, you know, $500,000 to $1,000,000 a year in revenue and you go buy another business that's doing $500,000 to $1,000,000 in revenue, you've doubled your sales overnight. You know, maybe you do a little bit more, maybe you do a little bit less, but you are exponentially increasing your sales of what may have taken you a lot longer to organically build up those sales.

This is something if you have ever looked at quarterly reports from publicly-traded companies, they will notate real growth versus acquired growth, because they're constantly buying smaller businesses and other businesses in their industries or doing mergers. So they show their shareholders what their actual sales numbers were, what their growth would have been without that acquisition, and then what it looks like with the acquisition. So it's a way of growing sales organically - you know, if you make the right purchase of a business, it should you know, if you make the right purchase of a business, it should almost always work.

Another great advantage of buying an existing business is it's a great way advantage of buying an existing business is it's a great way to bring on more employees. Over the last few years, especially in the US, some companies have been complaining about trying to find the right people for their organization. This can be a great way of hiring experienced people that have knowledge of the industry, just by making that acquisition. There are even companies out there that will buy other companies not even caring about their revenue or their profitability, just so that they can bring those employees in.

So this is a great way to add to your staff in a way that doesn't require you to spend hours and hours training skills of new hires. Another big pro of buying another business is acquiring their technology and/or their equipment. Sometimes, another business in your industry might have certain software that you've been thinking about switching to. Or they might have developed their own system or program that you know you can take advantage of.

This is a great way to help integrate it into your company, because you are also bringing the employees that know how to use it into your company, rather than just going and buying that product off the shelf and trying to integrate it without that expertise. Equipment is another big aspect of this. In certain industries, some businesses want to make a big investment into a new piece of equipment make a big investment into a new piece of equipment that should open up a new line of revenue for them.

But that can always be a risk. You know, if you're going to go spend 20, 30, 100, $200,000 on a piece of equipment with the hope or plan that it should be bringing in more revenue, but you're a little uncertain about how long it's going to take to get to that revenue, look around and see if you can find a company to buy that is has that piece of equipment that already has the customers and the revenue coming in from that equipment. You make that business acquisition, and now you've acquired the equipment that you want for that new stream of income and some of that stream of income already there in place.

Another big pro of buying another business to grow is that you're eliminating a competitor. So one less competitor in your field to compete with. You know, now this gets a little sticky, especially at large scale operations. The FCC may step in and say, whoa, you can't buy that company.

That creates a monopoly. And we don't want monopolies. Fair point. But if you're a smaller business in your city and you acquire a competitor to eliminate one more competitor, chances are that's not going to be completely game changing to the industry and or trigger risks of monopoly.

So one less company out there that you have to compete against by making that acquisition big pro. The last big pro to buying another business is it can help create economies of scale. Economies of scale are things that become easier as you grow or less expensive as you grow. In some cases, it's personnel.

You know, I talked about the advantage of bringing in employees, but maybe the companies are at a size where both companies have a person doing a role, but one person could handle that role for even the double the volume that you're doing or the increased volume. So you can reduce the payroll or shift that person into a new role to help grow sales more. Buying from suppliers. By acquiring another business, you've reached a certain volume where you can get better discounts from your vendors, or shipping costs, or logistics, or whatever it might be.

The economies of scale can help you save more money and be more profitable in the long run. Now it's all not sunshine and rainbows. There are some cons to growing your business through acquiring another business. One of the big cons is that your systems just might not be compatible.

They might be using a certain type of software or management program that just completely conflicts with yours. And it might not be worth the extra hassle and time and energy to try to integrate those systems - no matter how good the deal looks otherwise. Now, there are cases where it could be worth the hassle if the price is right. But systems that don't integrate well and don't gel well could end up costing you much more, than it's worth.

Another huge con to growth through acquisition is employee cultural fit. You have your culture at your business. Ideally. Hopefully, it's working well for you and your customers and your employees.

When you acquire another business, first of all, there's going to be some hesitation. There's going to be some apprehension on the part of those employees from the other business and your employees. I did talk about economies of scale where there might be some redundancies, maybe not everybody's needed. And that's what is going to be going through all of the employees’ minds when you do this.

And so unless there's a very good culture fit, and you're able to make that integration of culture very quickly - it could end up causing you more problems and more headaches than it's really worth. So cultural fit is a huge con of growth through acquisition. The other huge con is acquiring something, whether it's a line of business acquiring something, whether it's a line of business or equipment, or even just the company itself that turns into a distraction from your core business.

This happens to a lot. A lot of us are entrepreneurial. We like new things. We like new ideas.

You go out and buy a business that, you know, in some cases, maybe has nothing to do with your primary business, but you make a justification in your head of why it's going to fit, why it's going to add to your growth. But in reality, it just becomes a distraction for you and for your team and for your company and hurts both in the long run. Or even if it is a competitor, you know, they're doing the same thing. Maybe they have one line of business, or one aspect of their thing that you're thinking is going to be great to add on, but it just turns into that distraction, that problem.

And you put more effort and more time into it than really would be needed, and it ends up hurting the overall deal in your company as well. So those are some of the pros and cons of growth through acquisition. It's not something I talk a ton about. I'm more focused on that - That person that's just trying to get started instead of starting from scratch, buying that existing established business.

But it does come up often. I get asked about it, from existing business owners and others. So just something to be aware of, because if you've already bought one business, why not buy another, add it on, or keep them separate? But it is a great way to grow a business - if it's done correctly.

You need to be aware of the pitfalls, and make sure that you're taking the right steps and analyzing and doing due diligence very carefully. Hope you enjoyed this. I really look forward to your comments and questions about it. Or if you have any thoughts or if you've ever done this before, I'd love to hear from you and maybe get you on a future episode.

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