If we’re really better than our competitors, we can beat them and win market share, right? So why buy a competitor’s store when we can build our own?
Because, unless our offering is leaps and bounds ahead of our competitors’, picking up market share takes time and money.
Competitor battles take a toll on all market participants and the market as a whole. Price wars create unrealistic customer expectations and often depress prices long term. When competition gets nasty, competitors damage each other’s reputations and leave deep scars in a local market.
When competitors are already in place and the pieces are a reasonably good fit, retail acquisitions can be a shortcut to increased profits.
Some store owners haven’t thought about selling but would gladly entertain the idea if presented. Others would like to sell but don’t want to advertise and don’t know how to find a buyer. And some haven’t bothered looking because they feel no one would be interested.
Many have fought long and hard for small returns and are tired of the battle; if they saw a way out, they’d likely take it. Others have faced recent frustrations in personnel, banking, taxes, supplier relationships, key customers, sales declines, or any of the myriad other challenges of retailing; they’d welcome the opportunity to turn their problems over to someone else.
Even when a store owner decides to retire, he typically takes years to get around to it; a simple exit plan accompanied by a check might be all the encouragement he needs.
When an owner is willing to sell his store, it’s almost always because the store is losing money. He’s tired, running out of cash, and has lost hope. (That’s the meaning of “I'm just ready to do something else.”)
He’d like to just walk away but he’s responsible for a lease and needs to liquidate his inventory and other assets. He’d love to find a buyer who will simply take it all off his hands so he can move on.
The rare exception is when a store owner develops a serious health problem or dies. Then a profitable store must be sold, sometimes at a reasonable price.
When we buy a company at its highest sales and profits, we pay top price. In many cases there’s little improvement we can bring to its operations; indeed if the previous owner was good, it can be difficult to maintain the existing levels.
An unprofitable store often offers a better retail acquisition opportunity. Sometimes we can see its problems, have dealt with them before, and know the solutions. Occasionally they’re as simple as inappropriate pricing, poor location, wrong inventory, inefficient operating systems, poorly chosen personnel, or ineffective incentive systems.
Surprisingly often a few products, departments, or services are losing money while the rest struggle to make up. That fix is quick and simple: eliminate the losers and emphasize the winners.
And sometimes the store’s inventory, receivables, and people are more valuable individually than as an operating store. Often they can be profitably folded into existing operations, and the lease subbed or bought out.
Contrary to initial enthusiasm, very few retail acquisitions meet profitability expectations as ongoing operations. Sellers ask too much and buyers overestimate their abilities to improve sales and efficiencies or even to continue operating at the same level.
There should indeed be synergies, including economies of scale, increased buying power, sharing of best practices, and advertising economies.
But there are challenges too, including especially keeping good managers, communications, access to information, decision power, and motivation. The challenges almost always prove more formidable than the synergies.