Last month we talked about the wonders of synergy - how buying a business that has synergy with yours can be a great way to super-charge your growth. This month we want to talk about the potential pitfalls of this strategy.

 

As mentioned last month, the concept of synergy is simply that the sum of the parts are greater than the individual. That is, 1+1 = 3. Two companies combined can be worth more together than the two separately.

 

Synergy typically arises in two broad areas: Marketing or operations.  That is, either you can sell more to the same clients by cross-selling (marketing synergy) or you can merge production or head office (operational synergy). 

 

However, there are two major pitfalls when companies pursue this type of strategy:

 

1. Imaginary Synergy - many business owners think there is synergy when there is not. I remember a retail store I visited. It was a brew-it-yourself wine place. The first time I went in, the store was well laid out with displays about wine and grapes and varietals, etc. It was an interesting experience and the owner told me stories about wine and his home country. The next time I was there, it was under new management, and there were new displays selling cards, flowers, chocolates, etc. - it had become cluttered and offered a confusing client experience. I can only surmise that the new owner figured since wine was a romantic gift, why not sell other romantic gifts - but recall it was a brew-it-yourself wine place, where it takes six weeks before you can enjoy the product - not a "last minute convenient romantic gift" store. Not only did the store not realize any marketing synergies, but they alienated their core customers.
2. Real Synergy but Poor Execution - the synergy can be real, but it can be lost in poor execution. Many studies done on large businesses that merge show that most mergers do not achieve what the buyer had hoped for. Next month we will examine why, and how you can avoid the same fate.

Next month: Avoiding poor execution!   

 

In the meantime, if you would like more information on buying a business, contact us at 204-478-7266x110.

 

The easiest issues can be the most difficult when you sell a business. If you own a business with inventory, it seems obvious that the value of the inventory is in addition to the value of the business. So if you have a business worth a million dollars, and you have inventory worth a million, the buyer should pay you two million, right? (assuming no debt, or any other factors).

But is that always the case? What if you had the same business, but you happen to have ten million in inventory? Is the business (including inventory) now worth eleven million? Pushed to an extreme, it seems obvious that we need to start thinking about a "reasonable" amount of inventory. But how do we determine what is reasonable?

 

When we value a business, we research industry benchmarks. What is the norm in this industry? It is typically expressed in "number of days sales," that is, how many days of sales of inventory do you have on hand? 30 days? 90 days? Some people (especially at the retail level) think in terms of "turns," which is just the reciprocal - 90 days of inventory means the business "turns" its inventory 4 times per year (365/90=4).

 

So does that mean a "reasonable" amount of inventory is always included in the price? Not necessarily.  To avoid confusion, it is best to be clear upfront how much inventory is included (if any) and how much extra the inventory will cost. When you are preparing to sell your business, make sure you understand how the buyer will see the inventory - and how the deal will be structured.

 

If you are interested about the implications on selling your business, contact us at 204-478-7266x110.