Ten reasons to buy a business

Finding a business that fits one of the ten types of acquisitions is your first step to success when purchasing a company. The vast majority of business purchase transactions most often fall into one of the following categories.

1. Consolidation within a mature industry

If you are in a mature industry with excess capacity, purchasing a competitor may be a smart move to improve your business conditions. This can happen in several ways. In particular, buying a competitor to increase the size of your business can strengthen your position if you then find that you need to reduce supply to stimulate demand.

Another way — this is indirect consolidation in areas such as sales and R&D, which can help your business increase value.

2. Increasing the efficiency of the target business

If you believe you can significantly increase the operating profit of the business you want to buy, then that is an equally good reason to buy.

Successful acquirers can increase the revenues of their target companies in several ways. Clearly identifying the costs that can be reduced is a major factor in many of the most successful acquisitions in this category. This is a common tactic when private equity buys companies.

If you find the right goal and identify effective ways to cut costs and improve margins, you can achieve profit growth without major investments or new acquisitions.

People who do this successfully tend to choose businesses with low return on invested capital (ROIC) and low margins. Such companies are easier to transform in terms of efficiency than enterprises with high profitability and high margins.

3. Focus on business with the ability to scale taking into account the specifics of the industry

If you find a business that can offer you economies of scale that are specific to your industry, rather than just general, then it will be a good idea to buy. First, consider whether combining your business with another will truly provide economies of scale, or whether you both already operate at scale and have little to gain.

The key to a successful acquisition based on economies of scale is to determine whether the target can significantly reduce the cost of some particularly expensive part of your process, or whether you can gain economies of scale by buying a much smaller business that is not worth like a tropical island.

4. Identify businesses with potential early on

Identifying a company operating in the early stages of the life cycle of a particular product or industry and helping it grow in this rapidly growing area — another winning formula that can be applied to acquisition.

This is a favorite acquisition strategy for private investors, but it can also be used by ordinary buyers eyeing a business with potential. It could be a cutting-edge platform or a brilliant product idea. In addition, we can talk about the talent of managers or the company’s position in a fast-growing market.

5. Collapse strategy

This approach involves the consolidation of markets that suffer due to their fragmentation.

This is the market for asset management consulting services. With a static domestic market and rising regulatory and compliance costs, it becomes nearly impossible for companies to grow organically, leading large companies to take over their smaller competitors.

6. Buy cheap or distressed businesses

Looking for a profitable business can be an excellent strategy for a successful acquisition, provided you have the experience necessary to increase its value. Finding a good deal is not easy, but buying a distressed business — and even a business under administrative control, — may be a good way to reduce the cost of acquisition.

This approach is especially beneficial for those who have the knowledge and skills in conducting such transactions, as well as the specialized skills and experience in the relevant industry, to turn around a troubled business

7. Determine the company whose product you will bring to a large market

Small businesses often find it difficult to reach the entire market for their products. If you already have sales and communications channels in place to speed up this process for the target business, then acquiring such a company can be very profitable.

Having an experienced and large sales force can also help the target company's product reach the potential market faster and more efficiently.

8. Identify a business that provides valuable technology or skills

This is one of the most popular and successful acquisition strategies used today. This is partly due to technological convergence, which has seen technology permeate virtually every industry. Businesses are looking to adopt technologies that will help them compete.

Buying a business that provides you with the skills you need is also a smart strategy. Building these skills from scratch, such as when entering a new market, takes time and money, so acquisition may be more beneficial in terms of return on investment.

9. Consolidation to change competitor behavior

In some cases, acquisitions can be made that consolidate the industry so much that they encourage competitors to end their price wars. Choosing the right strategy is difficult because consolidation rarely changes the pricing behavior of competitors unless the consolidation reduces the industry to just a few companies. Even so, new entrants may offer lower prices to capture market share.

10. Engage in a merger that positively transforms both businesses

The success of this strategy depends on whether the management teams can carry out the merger and subsequent transformation of your companies. Success also depends on the right set of circumstances conducive to transformation.

The above strategies are intended to remind anyone embarking on a business acquisition to think long and hard about their goals and how the deal will realize them. It is possible to achieve success when buying a business, but those who have a clear plan that includes a well-researched and thoughtful strategy are much more likely to succeed.