Business Growth

Growth through acquisition of a customer

 

Should You Buy One of Your Customers?

Evaluation of this option for growth can be complicated and it is important to measure risks, costs, and benefits. Here are some of the issues to be evaluated.

1.     Synergies

This question is central to any strategic transaction. But besides the usual synergies (overhead reduction, facility consolidation, etc.), buying a customer that sells to another customer can often allow you to capture the margin they are charging their customers. Depending on the customer dynamic (distributor vs. additional service), this margin can be substantial.

2.     Operational and Strategic implications

Buying a customer can often open up an entirely new client base or new market for your business. Make sure you have the right expertise, the right people and the right infrastructure in place to handle the change; otherwise, you're likely to upset your new end customers. It's critical to anticipate and understand potential new challenges such as sales channel conflicts.

3.     Consequences of not acquiring

If you don't acquire the customer, will your competitor do so? And does that put your volume at risk? If the customer is selling because of financial distress, do you need to step in to make sure you don't lose significant sales?

4.     Negotiating Strategy

If a customer is a large enough part of your business, you run the risk of a) losing their business if the negotiations fall apart, or b) having the customer use the leverage of their business to get what they want out of a deal. You have to remain cognizant of how important the customer is to your business and what its alternatives are if it doesn't sell to you.

Businesses must be diligent when considering any type of acquisition. The questions outlined here are important when your acquisition target is also one of your of your customers. No one wants to lose a good customer, and with the right plan, strategy, and transaction structure, you can turn a potential loss into an increase in the value of your business.