To grow your business there are several alternatives. Buying an existing company can be a suitable alternative. It will give you a head start. Knowledge and staff are already available. There are fewer formalities, just the transaction of buying the existing business. The CFIE M&A advisor can inform you about all the other advantages.
Buying an existing company can be a satisfactory solution, especially with the concept of cross-border M&A. Overcoming the challenges of the different languages in the EU is bigger when starting a new company. Learn more about the M&A advisor who speaks your language.
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Most companies want to grow and get access to new markets. There are various reasons to do this. Companies can realize synergies in costs (like a decrease in transportation costs for their local clients). There are many other objectives to be achieved from being active in new countries. Further, companies might be able to serve their clients better, optimize their service portfolio or have other benefits.
In this document, we start to describe the alternatives for entering a new country. These alternatives consist of a greenfield investment, a partnership or an acquisition. After that, we describe some of the advantages of buying an existing business. We explore all of the individual advantages of buying an existing company instead of growing organically in a new market.
The normal way to grow into a new country used to be via trade with other companies. After that, an investment (‘greenfield’) was the way for many companies to establish itself in a new country. A greenfield investment takes a lot of time at a moment when one often has limited experience in a new country. This contradicts with the desire to move quickly. Especially these days more and more licenses are required which takes time to apply for. Hiring the right people is also an expensive and time-consuming process. Hence, a greenfield investment is a delicate and often slow-moving process.
Below we give some examples of advantages when buying an existing company compared to doing a greenfield investment.
Advantages of buying an existing company (cross-border):
The first advantage you have when buying an existing business is time. You can move much quicker and directly by having a legal and physical infrastructure in the country. You also have access to a team of people that are ready to move forward straight from the start. Buying an existing business gives you a head start.
The next advantage is that you get access to staff and knowledge directly. It is very important that you find ways to check the quality of the employees and get an idea if they have the knowledge and skills you need. We assisted one buyer in cross-border IT acquisitions mainly to have people to service its largest clients abroad. On the one hand, these new people needed specific training certificates but on the other hand, they also needed to be capable of dealing with the most important clients. Checking actual certificates is easy. Finding out if people can deal with large instead of small clients is something that is more difficult to do. However, in the end, getting access to qualified staff is the main advantage when buying an existing business.
Clients are, of course, very important. Winning new clients is a challenging task and if you can get access to new clients via an acquisition, this is an ideal opportunity. However, you also have to be critical of the quality of the clients of a target you acquire. How much do they depend on the relationship with the existing business owner? Are they active in the same industries you target? Do they have the size you want? Finally, are you able to sell more services or products to these clients?
The buyer mentioned above was only interested in multinational clients. The SME (small-medium sized) clients were of no interest to this buyer and had no value in the end. So, the new clients you receive when acquiring a company is a positive point. However, you have to know whether these clients are the ones you are looking for.
When doing a greenfield investment, you need to find everything out yourself. This can be very time-consuming. Alternatively, you need to hire a specialist organization to do research for you. Specifically, we are referring to:
When you buy an existing business all these items are normally sorted. Further, quite a lot of knowledge exists on a local level about these requirements. Especially if you have a company that is subject to a lot of regulation (e.g. when pollution is an issue) it is good to know that the framework to cover this is already in place.
Once you acquire a company you have a direct position in the new local market you are interested in. This direct presence gives you a huge advantage as you can continue to build your company further straight away.
Although this is not the main driver for buying an existing business, it can be a nice to have. You can think of NEN or ISO certification. It is also possible that the employees have certifications which can be essential in your business.
An existing business decreases your risks compared to starting a business from scratch. You can already see what is out there. During a due diligence process, you can check the business and the items which you consider to be risky. Once this is done, you have more certainty that the business is well set-up and that limited risks exist. On the contrary, if you start a business from scratch, you always have the risk that things will go differently than what you expected and the newly set-up company may not be a success.
Feel free to contact us if you have any questions concerning the advantages of buying an existing company. We have advisors that speak your native language and have experience with acquisitions. We are happy to give you our opinion whether it is wise for you to buy an existing company depending on the industry and country where you want to do an acquisition.
By knowing the advantages of buying an existing business it might be possible you want more information. We suggest visiting the process of buying a business to get insights about all the aspects involved. Another interesting page can be the costs of a business purchase.