Warning:Don't Buy Another Business Until You Read This

INTRODUCTION:

Whether I am performing a business appraisal or a business valuation, one of the key areas to cover off is a review of the business's competition and competitive position.

Why is this important? Well knowing who your competitors are is extremely important as they can very quickly take your business away from you.

What then are the 4 key things we look at when assessing a business's competition?

Figure 1: Not keeping watch on your competition is akin to falling asleep at the wheel. Photo courtesy Scolari Comerford Business Valuers Sydney

1. Who are the main competitors & what is the market share trend?

Sit down and list your main competitors. Try and work out relative market share of your trading region say over the past few years.

If you notice that your market share is eroding, what is causing this and how can you stop it? Decreasing market share will be a worrying trend for any potential purchaser, and any business valuer will discount the small business valuation accordingly.

2. basis of competition

On what basis does your business compete?

For example is it price, a service model, product etc?

If it is on price, how will margins be maintained? Can these be shored up by volume purchasing either directly or through a buying group? Can exclusivity be obtained from certain suppliers either by product or by region?

Does your business have a competitive advantage? If it doesn't, how will the business show that its products or services are better than its competitors or will it need to keep dropping its price to keep the business?

Figure 2: How much competition does your business have or are their companies waiting to take your position? Photo courtesy Scolari Comerford Small Business Accountants Sydney & Dubbo

3. Are there high barriers to entry?

How hard is it for competitors to enter your market?

The harder it is for them to do this whether it be cost, know how or some other reason, the better it is naturally for your business and will increase its business valuation. A lower barrier to entry will make your enterprise more vulnerable.

4. How price sensitive are the business's products & services?

Segment your enterprise's products and services and perform a price sensitivity analysis on each of these.

If the business had to drop its prices by 10%, 15% or 20%, what would this do to the bottom line. Could these drops be compensated by alternative sourcing of other suppliers or deals so that the negative impact on profit can be minimised?

Figure 3: If you had to drop your price on certain products due to competition, what would this do to your bottom line?  Photo courtesy Lara Scolari Gallery Balmiain

CONCLUSION:

When was the last time you asked the above about your competition? Do you need to revisit and take action accordingly?

Forewarned is to be forearmed so make sure you keep an eye on your competition or you could be put of business altogether.