Buying a Business … 1+1=3

Merging two businesses

Buying a business can be a valuable business strategy. Synergy is an interesting concept but what can it really mean when buying a business. In my prior business I had made many acquisitions to supplement organic growth. The analysis of buying these business followed the below simplified numbers. A brief explanations of the below numbers - 

Say you have 2 like businesses that both are in the business of distributing products or services to homeowners. Both companies have overhead cost of rent, advertising, utilities , insurance, phone, office cost etc. When buying a like company many of these cost become readily duplicitous – i.e. you don’t need 2 offices, you don’t need 2 phone systems. 

The below example shows that when Company A buys Company B the fixed cost will not increase at all. When a company does buy another like company many of the fixed cost are eliminated but rarely are all of the fixed cost eliminated. 

The example below shows the financial gain available in a well thought out acquisition and this format can be used as a starting point to analyze the synergistic benefits of such an acquisition. The fixed cost that will remain can be added to the Combined company and the projected bottom line should be reviewed to see if the bottom line still looks appealing enough to make the acquisition. 

For cash flow purposes I would analyze the initial benefits of buying a like company including the cost of acquisition and the benefit that exist after the financing cost has been realized. In the below example after 5 years the bottom line improves after the note of acquisition is paid down. Financing very often can be available through the business owner selling his company. Usually the business owner can analyze the synergy and cash flow of the acquisition better than an outside banker or other financing means. 

Also, when one company buys another company customers are lost and that fact should be considered in the acquisition. Will customers lost be 1%, 5%, 10%, 15%? This all depends on the type of business and parties involved. 

Buying a like business can be a very effective means of growing ones company. As a business owner I suggest you open your mind to the concept, look around you at potential opportunities and do the analysis. When analyzing look at best case and worst case scenarios for both projected sales and expenses from buying a like business. As with most business transaction the best business deals are the ones that both parties benefit. When buying a business, the seller can benefit from having a means to exit out of an undesirable situation and the buyer can benefit by eliminating some competition and growing sales. 

In today’s economy, businesses are struggling and from this adversity, can come opportunity. 

Company A                                                                   Company B                                                           New Company C 

Sales  $200,000                                                             Sales $200,000                                               Sales                     $400,00 

Variable Cost $60,000                                       Variable Cost $60,000                                       Variable Cost             $120,000 

Fixed Overhead Cost $100,000           Fixed Overhead Cost $100,000                                     Fixed OH Cost             $100,000 

Profit $40,000                                                                 Profit $40,000                                                 Profit                $180,000