Buying a business to grow sales margins

In their bid to make more money, business owners will know the importance of having healthy margins. One approach that can assist in this is buying a business to grow gross sales margins.

A company's gross margin, expressed as a percentage, is its total sales revenue minus its cost of goods sold (COGS), divided by the total sales revenue. The equation is simple, therefore: widen the gap between the revenue and the COGs and the business owner will end up with more money in their pocket.

While some business owners may buy a business to create an alternative revenue stream, snap up intellectual property or take on a new brand, business acquisitions can be a great way of enhancing the gross sales margins of the buyer’s existing business venture.

Gaining control over a supply chain
One of a business’ main expenses is its supply chain – the money it pays to other companies to provide the materials, equipment, storage, packaging and transport it relies on.

Each of the businesses along a firm’s supply chain will naturally apply its own margins. As such, reducing the number of links in the chain will decrease the amount of money it needs to pay to get a product to market; lowering the COGS will boost the gross sales margins.

For example, if an online fashion retailer acquires a small logistics firm it will no longer have to pay another company higher rates to deliver its clothes to the customers. While still having to cover the costs of the new business – which could also service other traders – the retailer will nevertheless have gained control of this element of its supply chain. By removing the inflated third party delivery costs but keeping a delivery charge the business has immediately improved its gross margins.

In September this year Arlington Industries, a global supplier of automotive and aerospace components, completed a business acquisition that could provide similar benefits. The Coventry-headquartered company bought DPE Automotive, a manufacturer of car parts based in County Durham.

By acquiring a manufacturing business Arlington has strengthened the control it has over its own supply chain – it can now produce and supply the car parts rather than having to buy the manufactured parts from a third party, which would carry inflated labour and factory costs.

Scale up, costs go down
One of the most orthodox ways of improving margins is to scale up the business’ operations. More often than not, increasing production will reduce the production cost per unit, meaning that if the sale price remains the same the vendor has a greater gross sales margin.

A great idea, of course, but naturally the challenge is having a big enough customer base to be able to see all that extra produce to. Buying a company in the same sector as one’s own business is a great way of growing a customer base and therefore gaining the opportunity to reap the benefits of these economies of scale.

Transforming into a bigger purchaser through the acquisition of another company gives immediate bargaining power with suppliers that should result in lower per-unit cost of goods. Acquirers sometimes find that the target companies have negotiated lower-priced agreements with suppliers or have been able to source cheaper suppliers without sacrificing quality.

Conviviality Retail’s reverse takeover – so named because it is actually the smaller of the two companies – of drinks wholesaler Matthew Clark highlights this point. Conviviality already owns off-licence brands Bargain Booze and Wine Rack, while Matthew Clark supplies alcohol, among other services, to more than 16,000 premises in the UK.

By buying Matthew Clark, Conviviality has immediately gained access to a huge number of new customers. With more customers, Conviviality can dramatically increase the orders it places with its drink suppliers – this greater volume translates into cheaper cost per unit and in turn, with revenue up and the COGS down, the company’s gross margins on the alcohol it sells will rise.

Maximising gross profits through a business acquisition
These are just a number of ways in which a company can increase its gross margins through a business acquisition. Importantly, all of the examples cited here pose several key advantages and avenues for growth; but by targeting the right businesses the buyers have also found ways to improve the amount of money they can squeeze out of their existing business model.

Improving efficiency, reducing costs, controlling the supply chain and growing a customer base are all effective tactics to ensure maximum gross margins from a business’ revenue. If a business buyer approaches a deal with these tactics carefully and diligently thought out then, as well as whatever new success the acquisition will bring, they can ensure their existing business becomes immediately more profitable too.

Post-acquisition finance strategy

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