Why are so many small businesses consolidating these days?

Image by Michael Giuffrida about strategyMerger and acquisition activity in the small business space seems to be at an all time high.  Many organizations are looking to buy or be bought.  But why? From the organizations we have worked with, there are a few major drivers of this trend.

  • Consolidation can lead to economies of scale
    • By growing the top line of the business, many of the overhead and administrative costs can be spread across a larger top line leading to greater margins for the combined business.  Additionally, the organization’s buying power is increased as it grows so they can procure their raw materials or third party services for less, again leading to greater bottom line profits.
  • Looking for a partner with complimentary expertise
    • Often times, an entrepreneur feels like they have taken the business as far as they can themselves and as such seek a partner with expertise in areas that they don’t have.  For example, they may be excellent at the technical aspects of their business but they have no formal training in the “business” aspects of their business.  This can lead to a business “maxing out” at a certain point without outside expertise to help maximize the policies and process of the organization. Bringing in a partner with these skills can help bring the business to the next level.
  • Looking to add on a complimentary product or service to differentiate themselves
    • Particularly with the ability for consumers to perform much of their own research and education on the internet, differentiating yourself from other organizations becomes very difficult. As such, it can be advantageous to add on complementary product or service lines to the ones you have always had.  This allows a consumer a more “one stop shop” reducing their overhead in managing suppliers.  If you can bundle these services together, it can also make it more difficult to be price shopped if making an apples to apples comparison is more difficult.

Ultimately there can be many other reasons for someone wanting to sell their business, but for healthy organizations these are some of the most common and can lead to stronger businesses that can continue to grow and weather varying economic climates over time.

Michael Giuffrida from Southington CT has been operating businesses since 1997.  He is an experienced entrepreneur in business management, profitable growth, business valuation, mergers and acquisitions, and information technology managed services.

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