5 Reasons Big Companies Acquire Small Companies
Why do big companies buy smaller companies? The better you understand buyer motivations, the higher price you’ll be able to get for your plumbing or HVAC business.
Business owners have all kinds of reasons for selling their companies. You may be ready to retire and want to make your assets more liquid, or you may want to recapitalize but keep a minority equity share in the company. There may be a family dispute driving the sale or strategic reasons.
You know why you want to sell your plumbing or HVAC business, but do you know what makes big companies want to buy your business? There are all kinds of reasons for big companies to acquire smaller companies, and the more you understand their motivations, the more effectively you will be able to position your business for a sale. You should draft a unique pitch for each prospective business that is thinking about acquiring your plumbing or HVAC company, and to make your pitch as compelling as possible, you should highlight the parts of your company that will provide the most benefit to that specific prospect.
This guide is designed to help you position your company for acquisition by providing an overview of the most common reasons big companies may want to acquire your plumbing or HVAC business. Here are five reasons you should keep in mind:
1. Increasing market share Market share refers to the portion of revenue a business has compared to the total revenue for that industry. Say the annual revenue for your industry is $10 billion dollars. This means a company that collects $1 billion in revenue every year has a 10% market share. Buying a company with $100 million in annual revenue increases its market share by another percent.
Note, these are just sample numbers. Large businesses don't exclusively look for HVAC or plumbing companies with hundreds of millions of dollars of revenue. These deals are often more modest and worth a few million or even several hundred thousand. Often, the goal of a big business is to buy several companies in an area that allow it to accumulate a larger total market share.
The bottom line, regardless of the exact numbers, is that acquiring companies want to buy profitable businesses, and you need well-organized financial records to back up your claims that your business can help them increase their market share.
2. Expanding into new geographic areas Businesses of all sizes acquire companies so they can expand into new areas. The acquiring company may have a presence on the east coast and want to be able to serve clients on the west coast, so they buy an established name in that area.
These acquisitions aren't always nationwide. They can include deals where a business wants to expand into a nearby state or even into a different area of their home state. This can be a great opportunity to leverage your brand identity — if your business is well known in your area and your brand is associated with quality, that can make the sale look more appealing to a big business that wants to expand into your area.
3. Diversifying products and services Adding new products or services allows a business to increase sales and gain new customers, and you may have products or services that the acquiring company does not have. You may serve commercial HVAC and plumbing clients, for example, and that may catch the eye of a big company that focuses primarily on the residential market but wants to expand into the commercial market.
You may have expertise in a certain type of AC or heating equipment, and the acquiring company may want to diversify its offerings to include that equipment. You need to identify what you have, find out how it benefits the buyer's business, and use that knowledge to your advantage.
You can see this pattern in a lot of large acquisitions that have drawn media attention. Facebook, for example, purchased Oculus. Facebook is a social media company, but Oculus makes virtual reality headsets. These companies have nothing in common, aside from their presence in the tech world — Facebook simply wants to diversify into the VR world.
Keep this story in mind as you search for a company to acquire your business. The right target may not even be in the HVAC or plumbing industry. They may do something completely else.
4. Acquiring talent Big businesses sometimes buy smaller companies because they want to acquire their talent. They may like your area, products, or services, but they are particularly focused on the skills of your management team or the proprietary processes you have in place. They may even want your personal skill set, which typically leads to a sale where you maintain a smaller equity share in the company and continue working for a certain amount of time.
5. Eliminating the competition Some companies buy other businesses to eliminate the competition. They may have trouble expanding into a new area due to the presence of an existing company. They may be losing sales because the customer base in an area is loyal to a certain company. They may not be seeing the sales numbers they want.
These situations and many others drive big businesses to look at the competition. Eliminating the competition allows them to increase their customer base and grow their profits without worrying about losing business to you.
These are the elements you need to consider if you're thinking about selling your HVAC or plumbing company. Big companies who want to acquire smaller companies for any of the above reasons are strategic buyers. They see something in your company that will enhance and strengthen their existing company. You need to highlight how your company brings advantages to their company during the offering and negotiation process.
Contact SF&P Advisors for help selling your business SF&P Advisors is a mergers and acquisitions specialist focused on the HVAC and plumbing industry. We can help position your business for a successful sale and, in particular, help you leverage your advantages to attract the best buyer possible. Contact us at SF&P Advisors for a free evaluation of your company and to learn more about our four-step acquisition process.