Buying a Business and how to Investigate the Competition
One of the key areas to consider when buying a business is to explore its competition.
I am often surprised by how many prospective business buyers overlook the competition in their search, and fear it when they are conducting their analysis on a specific business.
Let’s discuss the latter issue first, because for me, this is a very cut and dried issue. There are few, if any businesses that do not have competition. We all know competition is a good thing. If you continually revert back to the competition as a reason to not move forward with a business, then chances are you are not cut out to be a business owner.
Oh sure, how wonderful it would be to buy a business where you are the “only game in town.” If you find a business for sale that controls its marketplace for a product or service that is in high demand, then find a way to buy it, if of course you are the right owner for it. Unfortunately, that is rare, so don’t count on it.
I have a different take than most people on competition. This philosophy has worked exceptionally well over the years, and it is one that you may want to adopt as a business owner – doing so, will help you to understand this whole aspect with a clearer perspective.
In the several businesses that I have built/bought and operated, I have always welcomed the competition. It made me a better owner, kept me on my toes, and constantly forced me to look for ways to make my company bigger, better, and faster than theirs. Whilst I relished the competition, and in some cases had some good relationships with some of the owners, make no mistake, my objective was always to annihilate them.
Most importantly, I always looked for ways to clearly separate my business from theirs in the eyes of my customers and prospects. In other words, I made sure that I had a very distinct and obvious competitive advantage; I call this “The Point of Difference”. That strategy alone can prove to be the best sales tool a business owner has in their arsenal, and it is one of the best ways to build a customer base. Conversely, if you cannot identify a clear competitive advantage in a business you want to buy, then be prepared to own a company that is just another “me-too” business with very limited upside potential.
The lesson is not to fear the competition, but to embrace it.
As you become more serious about buying a business, it is critical to conduct a thorough review of the competition. You will want to get the seller’s perspective on them, but of course you cannot simply use their opinion as your research; it must be validated.
Some of the key questions and issues you will want to know and address are:
- Who are the competitors exactly?
- Why does the seller believe that people buy from them?
- Is there a “900 kg gorilla” in the group? In other words, are there one or two huge companies whom the business competes with? For example, if you are looking to buy an independent bakery store, and there is a “Mega Retailer” in the same vicinity that the clients could easily (and maybe more conveniently patronize). In this case, perhaps the business for sale can or does thrive because of its personal attention and “point of difference” to the customer, versus the cold environment they will experience in the super markets.
- Can new competition easily come into the marketplace in the new future?
- What barriers if any, would a competitor face to enter the same market? If you are looking to buy a service station perhaps, can another station open down the road? If so, rest assured that in time, one probably will, but if you build and maintain a “point of difference” it will have no impact on your business
When checking out the competition – let’s say a snow ball manufacturer. Contact them directly and play the role of a prospective customer. For any manufacturing or service-type business that does not operate a retail environment, you just need to call them.
Of course you must never, ever disclose the true nature of your call, and if you plan on using this approach, make absolutely certain you do not under any circumstances utter a word about the business you are thinking of buying.
Always try to speak to a salesperson. They will be eager to make a sale and will offer up a ton of information. You should ask them questions about their products, policies, and pricing. Inquire about why you should buy from them versus any of their competitors. Find out the size of their company, their guarantee, how long they have been in business, and how their business is doing overall. Ask them for client references whom you can contact (any good company will provide this information), and see what their customers have to say about them.
For a retail business, just visit the store. Look around and observe the business. How do their employees, inventory, store set-up and pricing compare to the business you are considering? Is the competitor’s store more appealing or less so, and why? What promotions do they offer? Do their point-of-sale systems look to be the most current? Speak to the employees (but again be VERY discreet). Ask them casually how the business is doing.
It is also a good idea to contact similar businesses in other parts of the state. You can ask for the owner and tell them you are thinking about buying their type of business in a different area (the further the better). Ask them for their advice about the industry, what they would look at if they were buying this type of business. If you can cultivate a bit of a relationship, they can be a great resource.
I have always found that most people are very helpful. You will not believe how much information you can get just by asking, so never be afraid. People are very accommodating, and quite often they are honoured that you would even solicit their advice.
The ultimate question you need to answer when investigating the competition and comparing them to the business for sale is this: If you were an objective customer in the market to make a purchase, where would you rather do business and why? If your choice is the competitor, then you will have an impression of what is happening. And so, you need to determine if you can reverse that perception and at what cost?
Conversely, if the business for sale is far and away better than the competition, then obviously that is a good thing. In this case, you need to be certain you are the right person to sustain that superiority, and increase it over time.
As you can see, there is a lot you can and must do to investigate the competitors of any business you consider buying. This exercise can truly be an eye-opening and highly educational experience.
Remember… competition is part of business life. Do not fear it; leverage it. Never take it for granted, and once you buy a business, do not curtail investigating the competition. You have to always know exactly what they are doing and rest assured, if their owner has any brains, they know exactly what your business is doing.
Author – Peter Troy
Seaboard Business Brokers