There are many factors to consider when purchasing a competitor. Arguably, one of the most important is their client list and the types of signage they produce.
Don’t forget to include future expenses from the purchase in your projections. Are you going to have to replace the aging equipment soon? What is moving going to cost you? Are you going to have to hire more bodies to deal with the volume? What are your financing payments going to look like? Do not forget to include the big chunk of change you are going to have to pay the tax man—13 per cent on a $500,000 purchase is going to hurt.
Understand what you are buying
Buyers and sellers are often not on the same page about what is being sold/purchased. In the 2015 deal, we were primarily after their files, phone number, and the website. The seller was trying to sell the whole shop, but we generously paid about a third of the asking price for the assets we wanted and left the rest so he could try to recoup as much as he could out of it. In hindsight, the biggest value in this deal was the phone number. We forwarded it to our shop and most of the customers did not even realize they were dealing with a different shop until we gave them the new address for pickup.
In the recent acquisition, we bought all sorts of “assets” that went straight in the garbage, including an operating flatbed we paid a good chunk of change for on paper. We were after the experienced staff, the fabrication division (missing piece for us for a long time), market share, website, and phone number. Everything else on the asset list was of zero value to us. Note that the staff did not come as part of the purchase price, but we would not have paid the purchase price if we did not secure the signed employee contracts.
The sellers will try to assign value to things you care nothing about. Understand what is of value to you and pay what you are willing to pay for those assets. You can still buy the whole operation, but do not pay more than what the assets you want are worth.
Don’t get caught up in the moment
The idea of purchasing a competitor is exciting. It could be easy to hop on the dream train and ride it all the way to bankruptcy. Make sure the deal really has value. Identify any risks that might be present in the deal. Are you going to be over leveraged because of financing? Is their last profitable year the result of an anomaly like the COVID boom some of our shops experienced? What are the possible outcomes if you do not go through with the purchase? Do any of those outcomes benefit you in a different way?
