Acquisition Opportunity but No Capital?
“My business needs to grow drastically in order to become competitive. We were recently given the opportunity to acquire a smaller rival, but we do not have the necessary capital. Should I take a loan?”
The question of if you should take a loan depends on many factors. Loans can be very useful tools when the need for new capital is immediate. Especially in times of economic downturn like the one we’re currently experiencing, small business loans are not just offered but encouraged in order to limit the damage to the economy.¹ But before considering accessibility, it’s important to consider necessity. Loans are, after all, a form of debt, which could have long-lasting implications for your business.
Breaking down your question, it appears that you are in a very competitive market in which the size of your operations impacts your bottom line. I’ll assume that this has to do with economies of scale, where cost advantages are reaped by companies when production increases, consequently lowering per-unit costs.² The opportunity to acquire a smaller rival is particularly advantageous, as it simultaneously eliminates a competitor, likely transferring some market share, and increases your capability to produce at scale. The issue of lacking capital may not however necessitate a loan, there may be other options.
One case study that comes to mind is Día Día Supermercados, a grocery store chain in Venezuela.³ After achieving minimal growth over many years, the company understood that in order to become competitive, it would have to operate at a much larger scale. But the concept of raising professional capital and the infrastructure necessary to do so did not exist in Venezuela. Día Día eventually came up with the idea of acquiring smaller competitors by paying on terms.
Terms refer to the conditions under which a seller will complete a sale. Typically, these terms specify the period allowed to a buyer to pay off the amount due and may demand cash in advance, cash on delivery, a deferred payment period of 30 days or more, or other similar provisions.⁴ In this particular instance, Día Día was able to negotiate to pay no cash upfront but to pay for the acquisition through the operation of the store itself.
In this situation where a smaller competitor has approached you for acquisition, there’s the possibility that their business may be struggling. Offering the option to pay on terms becomes a situation of mutual benefit, as your business will be able to achieve the scale necessary to become competitive, while the smaller competitor can immediately transfer business expenses (like ongoing overhead costs), securing a buyer that they may not have otherwise been able to find.
Paying on terms may appear similar to other types of debt, but with this agreement comes a lot more flexibility and potentially less risk. As always, you are encouraged to explore all your options to decide what suits your business best.
Footnotes
[1] Coronavirus (COVID-19): Small Business Guidance & Loan Resources
