A key advantage to buying an existing business rather than starting one from scratch is that an acquisition allows you to skip the expensive - and risky - startup stage. But you need to think carefully about what you're buying.
Different types of businesses carry different advantages and risks. Here are some to consider:
Franchises account for about a quarter of all business purchases. A franchise is proven and tested, so you are buying a business that is already successful. As a franchisee, you benefit from the knowledge, established production and management methods, publicity, advice and superior buying power of the franchisor. You gain security by offering a known product or service.
The tradeoff is that you have little room for creativity or opportunity for taking the company in new directions. You'll also have limited control over price, products and production.
Before purchasing a franchise, determine whether other franchises in your area are financially sound, whether the brand is well known and how stiff the competition is in your area. It's also important to know what restrictions and obligations are imposed by the franchisor.
You can consult the Canadian Franchise Association for advice. In Quebec, consult the Conseil québécois de la franchise, or CQF (in French), for information on franchising and affiliated businesses in that province.
Sub-optimal or failing businesses
Some entrepreneurs opt to buy a failing business at a bargain price and then turn it around. This strategy involves recognizing unexploited opportunities and capitalizing on them. You may also come across products that were not successful but still have potential. For example, an ecological product may have been brought to market when public interest in the environment was less widespread than it is today.
If you already own a business, an acquisition can be an excellent strategic move. Buying an additional business can help you enter a new market with ready-made expertise. It can also allow you to expand your range of products and services, and increase your operational efficiencies. A strategic acquisition is an ideal way to drive rapid growth and generate revenues that are not possible with your existing business. Such an acquisition may also provide extra collateral for additional financing.
Acquisitions typically provide an existing firm with new resources, capabilities and skill sets, along with new technology, physical assets, innovative business processes and rights to products that may strengthen a firm's position in the marketplace.
Acquiring your competition
This may enable you to improve on their ideas, increase your market share and diversify your product line. Make sure you don't run afoul of any rules that encourage competition.
Products that have been designed by another firm can be a way to expand the range of products your firm offers. A product designer may have a patent or prototype that your firm can manufacture and market for a royalty fee. You can also secure rights to reproduce a product with a protected trademark in another country.
Buying a supplier or distribution channel
This can improve your company's performance and cut down on delays. It may also result in increased buying power, which can lead to cost savings and operational efficiencies.
MBOs, in which a group of managers pool resources and purchase the firm they work for, are another option. Managers can reduce the risk they would face as individuals by acting together. Such buyouts offer several advantages over purchases by external buyers, since management teams typically have strong industry know-how, a good knowledge of risks and problems within the business, familiarity with current company culture and established relationships with customers, clients and suppliers.
Content in this section is provided in partnership with the Business Development Bank of Canada. BDC provides entrepreneurs with financing, venture capital and consulting services. To find out more go to BDC.ca.
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