Consolidating businesses is easier said than done. Unless the companies are in identical businesses, how do you know if you can consolidate the businesses? If you are buying multiple businesses which are for sale, how do you know you found the right businesses to consolidate? You can look at the following parameters:
- type of product sold, it is identical to yours, maybe the same product made by a different manufacturer
- if you substituted products, would your customer know? for example in the bottled water industry, there has been a lot of consolidation which has taken place over the last 10 years. If one company acquires another, they may change the source of the water used to make the bottled water. Will the public know? I had a case where a customer said that the water was much better from company A then company B. The ironic part was that both companies were small and purchased their water from the same company, the public has a perception but in fact the source was identical.
- who are the customers, are they synergistic or are they the same as your existing customers i.e. your customer is buying from two different sources.
- complementary products which are being sold. If Company A is a distributor for Company B, would your customers be interested in that product which you were not able to sell before?
- location, can the location be eliminated or does this provide a network of locations so that more customers can be serviced. If you have a location in the west end, can you service customers in the east end cost effectively? But if you purchased a location in the east end, your existing customers may start to use you in the east end because they already know you as a supplier.
- will there be cannibalization of the customer base? Many years ago, a printer was looking for a complementary business who sell their products through print brokers. Since the printer is a manufacturer, there was a concern that the new customers, business brokers would feel that the printer was a competitor and will not give you their business. In this case, you know that you will lose some of the business but your business model has to predict how many customers will you lose because they will not want to deal with you. In this case, you need to look at what are their options. If you are the only person in town to supply them, they will not leave, if you have only a handful of competitors or if you have hundreds of competitors, this will all come into the equation of estimating your loss of customers. If the loss it estimated to be too large, this may not be a good match.
Looking to buy a business which can be consolidated into your business takes a lot of work. You have to look at more than the the financial aspect of the purchase, you must look to the suppliers and the customers to see if they will stay with the new owner.