Buyers Will Focus on Your Geographic Density
By Maurie Cashman
Last week we considered Private Equity Groups as an option for consideration in your ownership transition plan. All buyers will focus on key traits in your business, one of which is geographic density.
As you consider your business sale, a large part of your transition planning should be focused on the traits in your business that a buyer would find as either strengths or weaknesses. These will either add or detract from the value of the business in the eyes of your owner successor. One of these traits that I look closely for is what an associate and I coined years ago as â€œgeographic densityâ€
I have had the privilege of working with several firms with national footprints in largely niche markets to grow, plan for, and successfully execute an ownership transition. One key trait that was common in all was that they often did a lot of business in far flung locations and had little recognition near their headquarters. Some of this was due to the location of their customers. Some due simply to chance as to where they were able to land a job which might lead to a foothold in an area.
The interesting thing about all of these situations is that we found that there were many potential customers within a close radius that the company did not know were there and that knew nothing about the company. They were buying from competitors in Dallas, Chicago, Denver, or Boston when they could have gotten the same product or service at lower costs and with better support locally had they known about them.
It takes tremendous discipline and intentional management to avoid this pitfall. There is always the temptation to go after a large sale or highly visible opportunity in an area that would put a feather in your hat. I contend that it is important to:
- Own your backyard and make it extremely hard for competitors to come in before expanding to new turf. You need to act like the lion and make others think twice about crossing into the territory you want to dominate and use as your foundation;
- Make expansion into new territories an intentional and well-considered part of your business plan and your ownership transition plan before embarking; and
- Act like the fox â€“ find an existing den and move into the ecosystem by working quietly with a sponsor who knows the area and feed off of them. Donâ€™t try to come into a new geography on your own. You donâ€™t know the culture and they donâ€™t understand yours.
Why is This Important to Buyers?
First, buyers like companies that they can understand. They like solid business plans that have stood the test of time and have the ability to continue to do so. Geographic density gives a buyer the comfort that your customers are more likely to remain loyal, that they can build relationships with them and that those customers can help the buyer grow the business.
Second, businesses with high geographic density tend to have lower cost structures. It is cheaper to ship locally than it is coast to coast. It is cheaper to supervise projects in a tight area than if you have several projects that are scattered throughout the country. These traits make your business more attractive because the buyer can build on your strength to intentionally move into other strategic market areas.
Third, many buyers, particularly Strategic Buyers and Private Equity Groups, may be looking at your product or service as something that they could add to their business as a â€œbolt-onâ€. If the buyerâ€™s business is concentrated in a geographic area they are much more likely to be interested in and pay a premium for your business if it overlaps their territory. This often because they are interested in your company because its product or service is something that they could push through their existing sales channel and they could use your sales channel to expand their current business. Itâ€™s a win-win.
Finally, some companies would like to move into a market in which they have no presence and limited knowledge. If you are dominant, the lion, in that market you become much more valuable as a strategic partner to them than if you are not well-known in the area. They get to be the fox in your lion den.