Most company origin stories start with an entrepreneur, an idea, and a business plan. Successive chapters for growing businesses convey achievements of increasing revenues, staff & infrastructure development, and market share acquisition. This corporate development storyline is often filled with wonderful stories about people who contributed to company success, years with record profits, innovation, and customer & public recognition. The historical record of many companies will only involve tales where growth and business development occur organically by growing and enhancing the existing business model.
However, organic growth strategies are not the only path an entrepreneur can pursue to strengthen the infrastructure of a business or increase revenue, profits, and/or market share. A common method of growth for mature companies is the acquisition of other companies. Growth by acquisition can have significant positive results. Think of where the United States would be today as a nation if forward thinking political leaders had not made the Louisiana Purchase or acquired Alaska.
There are multiple reasons for a company to acquire another business. The following are some of the more common ones I have witnessed as a twenty-five year mergers & acquisitions professional with IBA, the oldest business brokerage firm in the Pacific Northwest.
There are a limited number of seats on the fifty-yard line at a football game. This is also true in business. Acquisitions are frequently completed in the business world to facilitate obtaining a specific location in a city (This motivation can range from a retail business desiring a prime location on “main street” to a business with a shipping component coveting a strategic location in close proximity to air, cargo, or highway infrastructure.) or as a method of expansion into a new city, state, or region. Recently, I facilitated a meeting where a Canadian company traveled to Seattle to meet with ownership of a company that has the potential to serve as a platform for them to enter the United States marketplace as a manufacturer with domestic production capability.
I have witnessed acquisitions on both sides of the spectrum for capacity. It is common for manufacturing businesses to have extra capacity in terms of production or distribution companies to have excessive space. A method of remedying this situation is to acquire a company that can be incorporated into the business that will address this inefficiency. I have also seen acquisitions completed because a business has outgrown their current facility or is being forced to pay overtime or add shifts to satisfy production demand. Ramp up time and capital investment costs can be significantly reduced with the acquisition of a “going” concern that dovetails with present operations.
The Pacific Northwest labor market is presently tight. The growth of many companies is currently being stunted by their inability to find employees to facilitate growth. Business acquisitions are frequently completed to proactively address this labor scarcity and add quality, experienced personnel.
The Pacific Northwest is a robust garden for the creation of new software and technology. It is common for companies to acquire other businesses to enhance their product offerings, problem solve through development or deficiency issues, or eliminate competitive offerings from their space.
The large retailers (Amazon, Walmart, Target, Kroger, etc.) prefer to work with companies that represent multiple products. It is easier to secure purchase orders and shelf space, if more products are offered for sale that the retailers want to stock. A method of enhancing company product lines is to acquire businesses that have complimentary products or supply the same retailers.
Production or Distribution
Vertical integration is the concept of purchasing a business that is in front or behind you in the process of taking a product to market. It is common for manufacturers or distributors to purchase direct retail outlets for their products and retail businesses to purchase companies that supply them with product. IBA is presently working on a sale where a master distributor of a European manufactured product for the United States is acquiring a retail venue to directly sell some of their products.
In many industries there are benefits of being the first in a marketplace or by being able to influence the marketplace with significant market share. Starbucks does not desire alternative coffee choices for consumers to consider for their morning beverage on the way to work. They have aggressively opened locations and purchased competitors to insure that there is a probability you see a Starbucks location first when you are seeking your morning coffee.
Investors in companies like to see growth, increased profitability, and a strategic plan for the future. One method of satisfying investors is to execute a strategic plan where growth is facilitated through acquisition creating the opportunity to increase market share or revenue at rates that exceed what is possible with an organic growth strategy.
IBA, as the oldest business brokerage firm in the Pacific Northwest, has successfully facilitated over 4000 transactions. Many of the deals we have completed involved acquisitions of businesses by other companies. If you are interested in potentially selling your business to another company or growing by acquisition, we would welcome the opportunity to talk with you.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.