Gaining Entry to a New Market is a Good Reason to Buy a Business
Over the last several posts to this blog we’ve discussed business acquisition. Most of the points made have been specific to building a case not to proceed with an acquisition. Some of the reasons we’ve illustrated include the likelihood of internal conflicts where an acquisition target is a direct competitor, and the potential for damage to your core market position as you move to appease internal Line of Business (LoB) units.
But there are certainly positive reasons to proceed with an acquisition. The most prominent of these is gaining valuable entry into new markets through an acquisition. Let’s define “valuable.” Gaining a valuable entry to new markets means the target is already producing enough revenue from the new market to pay for its own operating costs. So, buying this business permits you to takeover this market position and pay for your presence in the market with the revenue the target is already producing.
In order to deliver on this expectation, you’ll need to permit the target to continue operations under its own brand, very much as is. We like this approach. There will be no need for your internal LoB units to bulk up to enter these markets, so the risk of direct competition is minimal, if not entirely removed as a threat. Any revenue over and above operating costs (including research and development costs required to retaining your market position) can certainly be contributed to the costs of your core business. The “instant on” speed of market entry, which is only possible through an acquisition, should also be a strong driver for your decision to acquire the target business.
The alternative to buying your way into the market through an acquisition is almost always much more expensive. Why don’t more acquisitions happen? Lack of cash, or equity in the case of public businesses, is the real impediment to consolidation in markets. But for strong businesses in weak markets it may be possible to acquire a target with a lot of seller financing.
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