This article are provided for information purposes only, and are not intended as legal advice.


Business strategies in tough times – Part III

March 11th, 2009

You are looking for a business for sale and want to buy it at a cheap price.  Well run companies making profits will generate a good price for their business.  How do you buy more for less?

 

If you have found an industry segment which you are interested in, then look for multiple smaller companies.  You may be able to purchase several smaller companies at a cheap price because the companies have high overheads and insufficient revenue to support the business.  If you can consolidate the businesses into one location similar to the alarm business which I mentioned in yesterday’s blog, you may be able to build a large company at considerably below market price.  In fact, if you were able to properly integrate these businesses into one, you would be able to sell them for a significant profit if you were able to take multiple companies breaking even to a larger company making money.

 

Unfortunately, this is not an easy task to accomplish.  You need capital to do this.  Banks do not understand this transaction.  If you buy 5 almost bankrupt businesses, then banker says there is no historical profit.  But if you show him that if you eliminate the overhead in 4 of the locations, you are instantly profitable.  The banker will understand the concept however their loans have up until recently been based purely on your past financial statements.  In this case, they look dismal and the banker would turn down financing this proposal. 

 

Consolidation in the market place is always taking place but usually it is done by larger firms who have sufficient cash flow that they do not have to finance this with bank debt.  Once the companies are assembled, the bankers will rush to lend you money when you no longer need them. 

 

If you are a distributor and you have 5 locations and you have a competitor with 3 locations all very close to your locations, what could you do?  if you purchased the business with 3 locations, you probably could shut down their three locations and integrate them into your locations.  You then get rid of fixed overhead including rent, staff to support the warehouse and now you may be able to consolidate the logistics of delivering the merchandise.  Instead of using a driver to deliver 1 item to a customer in the west end, one in the east end etc. you may be able to deliver multiple items to multiple customers because you are able to service more people in a smaller area.  As a result you delivery truck can deliver to more people in a smaller area which means you were able to reduce the cost of your deliveries as well.


Filed under: Business strategies — Gary Landa @ 9:26 am


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