GROWTH BY ACQUISITION

In 1986, Steve Berdines left his job as an engineer for Schlumberger and acquired Bishop Office Supply, a four-year-old Houston buisness grossing approximately $200,000 a year. Berdines, although successful in increasing sales, wasn't satisfied with the business's growth rate or his ability to purchase inventory at competitive prices. To increase his presence and buying power, he successively acquired Snappy Office Products in 1987, Davis Office Products in 1989 and Park Ten Office Products in 1990

About this time, several major discount office-supply firms were establishing multiple stores throughout the Houston area. Unable to compete, many smaller office-supply companies chose to sell or shut down their businesses. Berdines felt that he could successfully compete with larger firms by providing the personalized service he was known for. However, to compete effectively on price with the discounters, he needed to increase his buying power even further.

So he went on another acquisition spree, adding three more companies - one much larger than his own at the time - between 1992 and 1994. This enabled him to join a national buying co-op, Office City. Today, operating as Bishop's Office City, Berdine's company reports gross sales of $2.5 million.

"I could never have grown to my present level of sales by merely trying to take customers away from my competitors," he says. "By acquiring several competitors in my market and acquiring office-supply companies in additional markets, we were able to grow much faster than other methods would have allowed."

Many other owners of small to mid-sized businesses find that growth through acquisition is a proven way to start up and grow a business. Specifically, some of the advantages in acquiring existing businesses include:

Review a company's existing track record, as reflected in financial records and tax returns. This can prove to be very helpful in determining expansion plans. Growth potential can be measured based on actual experience rather than on conjecture associated with start-up ventures.

The need for additional working capital is reduced because of the immediate cash flow being generated by the acquired company.

You obtain skilled employees familiar with the business operation and market.

Gaining established customers significantly reduces the time it would otherwise take to attract sufficient customers to support a new operation's overhead.

Obtaining existing licenses and permits often reduces the time and cost of making application, gathering information and conforming to requirements.

Sources of capital for purchasing existing businesses are more readily available than for start-up ventures. It's very common for the owner of an acquired business to finance part of the purchase price. Banks and other financial institutions prefer to loan money on existing operations that have a proven track record.

One misconception that keeps some people from considering growth by acquisition is that the only businesses for sale are in trouble. The truth is that unprofitable businesses are very difficult to sell. Most acquisitions involve profitable businesses which owners are willing to sell because of retirement, ill health, partnership or family problems, burnout, a desire to try another profession or undercapitalization.

Where the right match is made, acquiring an existing company can be one of the most successful methods of growing a business. Each year, approximately 750,000 new businesses start up in the United States, yet less than 15 percent survive beyond five years. On the other hand, approximately 200,000 existing businesses are acquired by companies and individuals each year, with over 75 percent continuing to be successful five years down the road.

Reasons to Acquire

Expanding through acquisition has been a method frequently used by large closely held and publicly held companies. For many of the same reasons, small to midsized companies can also often benefit from this practice:

Syngerism with your existing business. By combining the two companies' resources and strengths, sales and profits can be increased. Combined marketing efforts generate more sales, while costs are often reduced as a result of greater purchasing power, combined facilities and additional skilled employees.
Open new geographic markets for existing products/services. The acquisition of existing businesses in new geographic markets enables small to misdized companies to essentially leapfrog two to five years over start-up operations. Most companies find it easier to expand from an existing business base than by building from scratch, especially in geographic markets that aren't as familiar as the home turf.
Expansion of new product/service lines. By way of acquisition, a company can obtain new product or service lines within its existing geographic markets. This works especially well if the acquiring company has available space, obtains new products and services otherwise unavailable and has the staff, time and ability to handle the additional products/services.

Sources

The primary resources for finding profitable businesses for sale include the following:

Publications. Each week, hundreds of business-for-sale are advertised in local newspapers and national business and trade publications. However, owners are often reluctant to overtly advertise a business for sale, so additional sources also need to be consulted.
Suppliers. By making your suppliers and vendors aware of your criteria, they may be able to provide you with leads on prospective businesses that aren't actively on the market.
Direct Mail. Directly contacting owners whose businesses meet your general acquisition criteria can generate potential seller prospects. A shortcoming of this method, however, is that these owners probably aren't highly motivated to sell, which puts you at a negotiating disadvantage.
Business Brokers. Their full-time job is to contact business owners and identify those motivated to sell. In addition, brokers are usually involved in helping the owner determine a resonable value for the business and can often assist in securing financial resources for the acquisition. The broker's fee is typically paid by the seller, based on the business's market price. There's also a growing number of business brokers who represent only buyers and for a fee will actively search out businesses that meet your acquisition criteria. Another use of brokers is when time constraints require immediate results.
Internet. A key word search will generally turn up over 200 home pages with a businesses-for-sale listing. Many have been established by business brokers with listings that are local, national or international in scope.