Acquiring Competitors: Due Diligence and Integration

Why Acquire Instead of Compete?

Organic growth is slow. Marketing campaigns take months to pay off. Hiring salespeople takes time. Building brand recognition in a new market takes years. Acquiring a competitor gives you something organic growth can't: instant revenue, an existing customer base, trained employees, and market share — all on day one.

But acquisitions are also the fastest way to destroy value if you get the due diligence or integration wrong.

Identifying Acquisition Targets

What Makes a Good Target?

• Complementary customer base: Customers you don't currently serve, in markets or segments adjacent to yours
• Recurring revenue: Businesses with contracts, subscriptions, or repeat customers are worth more than project-based businesses
• Reasonable valuation: Small service businesses typically sell for 2-4x seller's discretionary earnings (SDE). Overpaying kills the deal economics.
• Owner-dependent but fixable: Many small businesses are owner-dependent, which depresses their value. If you can replace the owner with a manager, you unlock significant value.
• Cultural fit: If their team hates your management style, you'll lose the employees and the customers that came with them.

Where to Find Targets

• Business brokers (they list businesses for sale)
• Direct outreach to competitors (many owners are open to selling but haven't listed)
• Industry associations and trade groups
• Your CPA or attorney network (they often know who's thinking about selling)
• Online marketplaces: BizBuySell, BusinessBroker.net, DealStream

Due Diligence: What to Verify

Due diligence is where most acquisitions are won or lost. You're trying to answer one question: "Is this business actually worth what they're asking?"

Financial Due Diligence

• 3 years of tax returns and financial statements. Compare them. Discrepancies between what's reported to the IRS and what's shown to you are a red flag.
• Revenue concentration. Use the Customer Concentration Calculator. If one customer accounts for 30%+ of revenue, that's a risk — they might leave after the acquisition.
• Accounts receivable aging. How much is outstanding, and for how long? Old AR may be uncollectable.
• Debt and liabilities. Outstanding loans, tax liens, pending lawsuits, lease obligations. You inherit these in an asset purchase or stock purchase.
• Normalized earnings. Adjust the financials for owner perks, one-time expenses, and non-recurring items. This gives you the true earnings of the business.

Operational Due Diligence

• Employee review. Who are the key employees? Will they stay? What are their compensation and benefit expectations?
• Customer contracts. Are they transferable? Do they have change-of-control provisions?
• Vendor agreements. Are pricing and terms favorable? Can they be maintained after the sale?
• Technology and systems. What software and tools are in use? Will they integrate with yours?
• Licenses and permits. Are they current and transferable?

Legal Due Diligence

• Pending or threatened litigation. Lawsuits you inherit can exceed the value of the business.
• Intellectual property. Does the business actually own its trademarks, patents, and domain names?
• Regulatory compliance. Any environmental, safety, or industry-specific compliance issues?
• Employment matters. Wage and hour compliance, non-compete agreements, employee classification issues.

Valuation

Common Methods for Small Businesses

• Seller's Discretionary Earnings (SDE) multiple. SDE = net income + owner salary + owner benefits + depreciation + one-time expenses. Multiple ranges from 1.5x to 4x depending on industry, size, and growth.
• Revenue multiple. Typically 0.5-1.5x annual revenue. Used more for SaaS and recurring revenue businesses.
• Asset-based. Sum of tangible and intangible assets minus liabilities. Floor value for most businesses.

What Moves the Multiple

• Recurring revenue (higher)
• Customer diversification (higher)
• Owner dependence (lower)
• Growth trend (higher for growing, lower for declining)
• Industry dynamics (competitive or commoditized = lower)

Financing the Acquisition

SBA 7(a) Loans

The SBA's 7(a) loan program is the most common financing for small business acquisitions. Key terms:

• Up to $5 million
• 10-25 year terms
• Typically requires 10-20% buyer equity injection
• SBA guarantees 75-85% of the loan, making lenders more willing to approve

Seller Financing

The seller carries a portion of the purchase price as a loan. This is common (60%+ of small business sales include some seller financing) and signals the seller's confidence in the business.

Typical terms: 20-40% of purchase price, 5-7 year term, 5-8% interest rate.

Earnout

A portion of the price is contingent on the business hitting post-acquisition performance targets. This bridges valuation gaps — if the seller claims the business will do $1M in revenue, tie part of the price to actually achieving it.

Deal Structure

Asset Purchase vs. Stock Purchase

• Asset purchase: You buy specific assets (equipment, contracts, IP, goodwill) but not the legal entity. Preferred by buyers — you avoid inheriting unknown liabilities.
• Stock purchase: You buy the entire legal entity, including all assets and all liabilities. Simpler for the seller but riskier for the buyer.

For most small business acquisitions, asset purchases are the standard.

Integration: The Hard Part

Buying the business is the easy part. Integrating it is where value is created or destroyed.

The First 30 Days

• Communicate immediately. Day one: meet with all employees and key customers. Reassure them. People fear change, and uncertainty causes the best employees and customers to leave.
• Don't change anything yet. Observe, learn, and understand before you restructure. The business was successful for reasons you may not fully understand.
• Retain key employees. Offer stay bonuses or retention agreements for critical team members.

Days 30-90

• Identify quick wins. What can you improve immediately with minimal disruption? (Better tools, streamlined processes, cross-selling opportunities)
• Begin systems integration. Migrate to unified accounting, CRM, and communication platforms.
• Evaluate the team. Now you have enough data to make staffing decisions.

Days 90-180

• Complete systems integration. By month 6, both businesses should operate on one set of systems.
• Implement cross-selling. Introduce the acquired business's customers to your products and services, and vice versa.
• Measure results. Compare actual performance to your acquisition projections. If you're off track, diagnose and adjust quickly.

Common Acquisition Mistakes

1. Overpaying. Don't fall in love with the deal. Walk away if the numbers don't work.
2. Skipping due diligence. Every shortcut in diligence shows up as a surprise post-close.
3. Losing key people. If the top salesperson or operations manager leaves, you just bought an empty shell.
4. Ignoring culture. Forcing your culture on the acquired team creates resistance and turnover.
5. Moving too fast. Integration takes 6-12 months. Rushing it causes errors and resentment.
6. Underestimating integration costs. Budget 10-20% of the purchase price for integration expenses.

The Bottom Line

Acquiring a competitor can be the fastest path to meaningful growth — if you do the homework. Thorough due diligence protects you from overpaying. Smart deal structure protects you from surprises. Patient integration protects you from losing the value you just bought.