Wednesday, August 12, 2009

Should you Expand your Business through Acquisition?

Despite today’s market, countless business owners are finding ways to weather the economic storm and keep their businesses profitable. The gut instinct for many is to look for ways to cut costs internally by trimming headcount, salary, employee hours, or seeking ways to reduce production costs or improve efficiency. Some business owners, though, could benefit from considering business expansion.

There are plenty of ways to expand a business. The most basic form of expansion is to focus on your current customer base and adapt your business’s offerings to fit their changing needs. This may involve purchasing new equipment or enhancing the inventory selection to provide more products or services applicable to a variety of demographics. Excellent customer service is also essential when today’s consumers have many options available to them. Providing additional support hours at the request of customers, for example, is a surefire way to maintain a more loyal following and possibly generate word-of-mouth recommendations.

You can also look to expand your business to new customers by introducing a new location, acquiring a competitor or moving into a related industry. Not only will these expansion opportunities help position your company for continued growth, they will also enhance your business’s selling power once it comes time to exit the business. Here are some questions every business owner should ask themselves, however, before considering any type of expansion.

What Type of Expansion is Right for Me?
Not all types of expansion will work for every business or for every industry. Business owners need to be particularly diligent in researching what will work for them and what resources they have at their disposal. Before considering expansion, rule out the options you know are not plausible, or that you simply don’t have the time, money or desire to pursue.

You can make this decision by doing some initial research. If considering expansion that goes beyond internal activity or purchase, talk to local business brokers and ask for their input into what trends they are seeing in your industry. You can also look at competitors that may be expanding to see what they did and where they had success or failure.

Will I Really Benefit From Expansion?
There are several benefits that could come with business expansion, but also a lot of assumed risk. Some things to consider include:

Economies of scale - Expansion may expose you to economies of scale, with cost advantages that result from having expanded. Consider if this might be the case for you.
Customer base -- Not only should you ask yourself if expansion will expose you to new customers, but also if your existing customers will remain loyal while you work out all the growing pains.
Yourself - Will expansion bring unavoidable stress into your life that could potentially deter your ability to successfully operate the business under the new expansion?

Can I Afford Expanding the Business?
In today’s market, business loans are not easy to come by. With big lenders struggling to survive the market, receiving a loan for your business may be a bit more difficult than anticipated. People who are getting loans are being forced to leverage large pieces of collateral, such as their homes. This adds a lot of risk to any type of business expansion because failure could mean the loss of not only your livelihood, but your home as well.

For buyers considering the purchase of another business – whether it’s a competitor or a business in a related industry – seller financing is proving to be one of the only ways to get a deal done. Seller financing is a loan provided by the seller of a business to cover an agreed percentage of the sale price. Consider how you will fund your expansion before taking any drastic steps.

Getting Started with Expansion
Once you have decided to take the initial steps toward expansion, consider how exactly you will make it happen. If it is only internal growth, put together a plan for how you will allocate resources and what you will do to make your current business bigger and better.

If your plan includes acquiring a new business, judge how well you feel you can take on that process yourself. There are several tools already in place, such as buyer acquisition programs that utilize the expertise of business brokers and intermediaries to set your goals, identify target businesses, screen the businesses, advise on offers and assist with negotiations and closing.

While there are countless considerations to make before deciding to expand your business, these three standard questions can help facilitate your decision-making process. Taking advantage of the downturn -- with its lower business-for-sale asking prices -- by buying up your competition can put you in a great position for when the economy bounces back.

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