In 1st grade I wasn’t all that excited about New Math. In the mid 80s things changed. I learned about the “New Math for Business.” New Math for Business is a lot more interesting. Here is how it works:
2 + 2 = 7*
*(sometimes, a little less – often, many times more)
Almost all of the “Big Boys” use acquisition to accelerate their business growth.
Why? Because growth through acquisition is much faster, less expensive, and far less risky than other methods of growing your company. Almost all major companies use acquisition to grow.
I can show you how small and mid-size companies can also expand rapidly and safely by making well-planned, well integrated and well executed strategic acquisitions.
A proven and time-tested strategy to optimize your business is to buy your competitors.
I believe the information in this article will help you in your goal to build a more robust, faster growing and more profitable company. More importantly, I believe you will discover a growth system that will propel you through your entire business life.
There are multiple ways to grow your business. There is one strategy that can be implemented at a low cost and a minimum of risk when planned properly. It works for the “big boys” on a regular basis. It works just as well for smaller and medium sized businesses.
After each acquisition, I recommend that you implement a profit optimization system to maximize the long-term business potential and maximize profits and cash flow.
You CAN often afford to buy your competitor even if you appear to be the weaker competitor.
You can do this even if you think you can’t afford it. In this economic storm, many of your closest competitors will be more frightened than you are. They see the glass half empty… you see it’s half full. They fear the personal nightmare of losing their homes, pulling their kids out of college, pawning their jewelry just to make ends meet.
You are calm. You are prepared. You’ve done your homework. You’ve forecasted carefully, conservatively, and even worst-case. You know that when you combine companies, eliminate duplicate costs, make a few dozen other strategic and tactical changes, and negotiate the right arrangements, you will earn far more money than it will cost you to buy the business. You set up protections in the agreement that avoid risk to you. Payments for the competitor business are made only out of additional added profits and cash flow.
You can grow quickly, profitably and with a minimum of risk.
The techniques used by the “Big Boys” are not a secret and they are not complex. Since 1980, I have been working closely with very successful and profitable emerging companies. There are many simple methods for growing a business very quickly. However, there is one method that is far and away more successful than most.
My experience with these solid, fast-growing, leading-edge companies has led me to conclude that the best, fastest, most reliable way to build a rock-solid, fast growing, entrepreneurial company is to acquire your competitor’s business with a no-cash, or low-cash, out-of-pocket purchase.
After the purchase, implement a profit improvement system to maximize the combined business profit potential.
My strategy has succeeded with progressive entrepreneurs who followed this basic format:
- Locate a competitor who is a likely motivated seller.
- Negotiate a deal that allows a monthly positive cash flow sufficient to pay off the monthly debt service on the purchase of the business.
- Purchase the competitor company and then you make one small, low-risk profit improvement change each week. This can increase the cash flow by 50% to 300%+ very quickly.
The potential benefits of making good, well-timed, strategic purchases of your competitors are:
- Purchase for little, or no, cash up-front
- Payments are made only out of new, add-on profits and cash flow
- Realize immediate cash flow (often you can make more net profit than the current owner did)
- Purchase at little or no risk to you
- Immediate improvement in cash inflow
- Immediate improvement in new earnings and profits
- Possible income tax benefits
- Better and stronger bank relationships
- Improved relationships with customers and vendors
- Build an expanded, rock-solid base while your competitor(s) are having tough times
- A customer list that is active and may be open to new and bigger profit services
- Compile a list of ex-customers that you may be able to reactivate with a new management team
- Acquire inventory and other capital assets at a potentially deep discount
- In some situations, you may want to sustain additional locations to expand market reach
Here are the “Big Picture” strategic steps that make this process work.
- Buy a target business that has a positive operating cash flow after you implement your operational changes. The goal is that you will make more than adequate cash to cover all debt payments on the purchase of the target.
- If the owner of the target company is retained to continue working for the buyer, their duties should primarily focus on making sure the former clients of the target company are satisfied customers. The former owner’s compensation should be tied to customer retention.
- Prepare a detailed integration plan of how the combined companies will be operated together.
- Eliminate duplication of costs, personnel and any unnecessary costs.
- Prepare a detailed profitability analysis and develop a plan to increase the profits, decrease non-strategic costs and identify other business and strategic opportunities. A typical and reasonable goal is to double the profit achieved after elimination of duplicate costs.
- Once the combined operations are stabilized and running smoothly, begin looking for the next target to acquire.
If you want to buy your competitor, what are the detailed steps in the process?
- Self-assessment – does the current management have the skills necessary to manage the people and process of a quickly expanding business?
- Determine the objective of buying a competitor (i.e., faster growth – buy the business cash flow to add to your existing business, or faster expansion into new markets -expanded products, services or geographic areas).
- Compile a list of possible targets.
- Make the contact with targets.
- Find an interested, motivated target and sign a confidentiality agreement.
- Request information from the target – financial statements, tax returns, business plans, lease agreements and other relevant documents.
- Determine if this is a transaction that appears to have good potential for the buyer.
- Review documents and prepare projected financial results of the combined companies.
- Determine the value to the buyer of target’s operations.
- Conduct interviews with the current management of the target.
- Prepare a letter of intent covering key provisions to be included in the purchase agreement.
- Develop a summary plan for the changes in the target’s operations after the sale is completed.
- Initiate a “due diligence” review.
- Draft a purchase agreement.
- Close.
- Tend to the post-closing transactions, duties, adjustments, etc.
- Update and expand the plan for the target’s operations.
- Make necessary changes to target’s operations.
After the purchase is complete, employees will be justifiably concerned about their jobs and what the change in ownership will mean to them. Try to be as open and honest with them, and give them as much insight into the future business plan, as is reasonably possible. It is often wise to make your changes slowly. Really get to know the operations and all of its subtleties rather than taking a meat clever to all the old systems, procedures and operating methods. Work the plan that you developed but be flexible in response to additional enhanced information. Many experienced business buyers require, as part of the purchase agreement, that the former owner remains on as a consultant for a period of time. Some former owners can offer valuable insight into the changes you are making. Others, of course, have little to offer.
The scope of this article does not allow for an detailed discussion regarding: 1) the many factors influencing the integration of the two, or more, companies, 2) methods of financing the purchase, 3) methods of reducing the risk in the transaction, 4) setting a value on the target company, 5) detail procedures for due diligence. Many of these items are covered in our free report identified below. Also, it should go without saying that competent advisers need to be employed for the tax and legal areas, and perhaps, advisers for merger and acquisition, valuation and other technical areas.
I believe the growth strategy of buy-your-competitor can help you dramatically build a more robust, faster growing and more profitable company. The “Big Boys” use it and so can you.
RESOURCES:
You can buy your competitor – with little cash out of pocket – expand your business overnight – with a minimum of risk – improve your profits and cash flow – discover a growth system that will propel you through your entire business life.
Get your copy of our detailed plan teaching you “How to Buy Your Competitor Using Its Cash Flow to Improve Your Business” Click Here