There are two major kinds of business growth models, one way to grow a business is to use traditional marketing methods which include organic growth via promotional methods. The other way is to grow via acquisition by purchasing your market share as opposed to only growing it. Although these methods can be used simultaneously, however sometimes acquisition growth models are a better way to grow a business faster and bigger. There are many traditional methods you can use such as TV advertising, newspapers, Internet marketing and much more. However, when you grow via acquisition or purchase a business with an already existing customer base, there are numerous advantages that come with it.
How fast can you grow?
Let’s look at the first way of growing a business, the traditional way. If you run a small business you will no doubt know that your marketing is the lifeline of your business, if you stop marketing your business your revenue an cash flow is likely to drop the very next week. If you decrease your product range your sales may decrease as well, if you don’t grow as fast as the market grows your business will fall behind. If you’re a small business owner, you will no doubt have a plan of attack similar to this one: Get the Yellow Pages, the newspapers, word of mouth or on the Internet and try and get as much of your business out there has possible within your marketing budget. Now, most businesses will gain between 10 to 15% in growth by using traditional marketing methods. That’s if you get it right. The problem with traditional marketing is that it is more or less hit or miss, which means you have to spend the money on advertising now, in hopes of getting a return later.
However, for some businesses 10 to 50% of growth is not enough to keep the business paying back all its capital and debt whilst providing the owner with a somewhat “free” lifestyle. Sometimes you’re stuck in a business that is not growing fast enough or it’s not making the ends meet, you need to get 100 customers to pay off some debt for example and you need them fast. If you use the traditional method, then you may find yourself in a very stressful environment.
You can consider purchasing another small business that is for sale, that shares the same customer base that your business services. You can cross sell all the products between the 2 businesses whilst still maintaining their brand value in the market. Purchasing another business is not a short term solution to handle your cash flow issues. You can use many other methods to solve most small business cash flow issues. Growing your business via acquisition is a major turning point in your business and requires you to do the proper research on how to correctly structure the details of any deal.
Now let’s look at some much larger businesses such as Berkshire Hathaway for example, the majority of their expansion plan lies on acquiring good management run companies that they add to their portfolio. In fact Berkshire Hathaway rarely does aggressive marketing for their brand. This is because they have key members that go into the market and try and find businesses that will buy their products for them and vice versa. In fact most companies on the public market grow via acquisition, it is much easier to sell to existing customers than it is to sell to new customers. This is a known fact.
As a small business owner, it is natural to have a mentality that your business has to work hard for you to be successful, if you keep your customers happy you will be successful, or if you’re lucky you will make it. This is a traditional mindset, if you going to go into business, it helps to think big. It helps to aim high and perhaps think of your business as a multi-tiered company that acquires other businesses for growth. There are numerous businesses (usually your competitors) that are that are looking for a quick exit, you have to be looking out for these opportunities. You can easily purchase a business in distress much quicker because the business owner will settle for less in return for a speedy acquisition.
Not all smooth sailing
It is important to note that growth via acquisition is also a very risky proposition. You have to know what to buy and you have to know when to buy it, if you own a plumbing company, it is not much use you buying an insurance company. You have to buy companies that are synergistic to your business plan. Companies that have a client base that will buy your products and vice versa. Or maybe companies that have a client base that will add to the strategic value of your company. Ensure that you speak to a corporate advisor who has done transactions similar to one that you are looking to conduct.
Another angle of growth for acquisitions is to purchase competitors. This is one of the better ways to gain market share and get rid of your competitors at the same time. However, it is not as easy as it may seem, first of all competitors aren’t always interested in selling at any given point, that selling decision may be surrounded by circumstances in their life. You may have to wait on your guard for an opportunity. That is why I refer a lot to being acquainted with your 3 or 4 major competitors. Or you can simply go into their business and make them an offer that they can’t refuse.
This will all depend on how much value you think you can extract from the other company and add-on to yours and this will also depend on whether you are financially stable enough to buy that company. In most cases most owners have a price. If you keep steadily pushing to that price, they will crack. Keep in mind that you have to think synergistically. Don’t go out of your way to purchase you competitor if it’s outside your means, you also have a price point that you can’t go over because your costs will invariably outweigh your profits.
Mo money mo problems
Let’s talk about financing, if you run your traditional business it is a good chance that you’re marketing budget is within your business. If you are to get more customers, then you have to dip into your own pockets for the cash, but you already don’t have that much cash in your account.The problem comes in when a new, bigger competitor comes into your market and tries to bully you out of it with lower prices and supposedly better service, you find that you may need to bring in more finance to secure your presence in the market. So the first thing you do is you look for outside financing, whether it’s the bank or an investor, anyone that could finance your marketing, it could be a product expansion or a new billboard on the motorway. The point is you need more money to continue to grow, every time a bigger competitor enters your market. You may find resistance from the banks and investors, because of the hit and miss nature of advertising.
This is where growth via acquisition makes more sense, buying another company with an established client base and an established revenue stream is much easier than expanding your current business using your marketing plan. Banks like loaning funds for entrepreneurs that have acquisition projects. Business loans that “may” provide a return on Investment are scrutinised heavily and your capital raising chances may lower. Investors may also be interested in funding your project as there is less risk in you buying an established business that has solid revenue streams and you’re bringing that revenue into your current business.