Should I buy out my competitor’s store?

QUESTION:

My partner and I recently started up a retail store. Within a two mile radius, we have two competitors who have been in the area for over 15 years. We have had great success so far in the first seven months. Recently, we heard that one of our competitors is trying to sell his business. We have no doubt taken much of his business. My question is whether we should buy him out to shutdown his store and gain his customers? Or, should we just wait for him to go out of business? There is always a chance that someone may actually buy him out and ramp up his store to become more of a competitor for us. We have seen his financials, and he is showing growth from last year’s numbers, which we find very hard to believe considering we are doing close to the exact same revenue. He is in poor health and wants to retire ASAP.

ANSWER:

Naomi Kokubo

by Naomi Kokubo, Cofounder of Founders Space

This is a tough question.  Here’s what I would do.  Inquire on how much your competitor is willing to sell his business for.  Once you figure out the lowest possible price, you can run the numbers and better understand the choice you have.  Here’s how I see it:

1)  If you buy your competitor’s business and shutdown the store, there are a number of costs, including the money you pay for the business, legal costs, your time, etc.   You need to factor in all the liabilities that you may be assuming when you purchase the business, including any leases, debts, taxes owed, and other obligations.   It could be a messy situation.

2)  If you choose not to the buy the business, there is a risk that someone else will come in and compete with you.  In this case you need to compute the total hit on your business in terms of revenue and profit lost if this should happen.  You also need to evaluate the likelihood of this taking place.

Once you have all the numbers, compare the two financial scenarios.   Keep in mind that even if you buy the business and shut it down, that doesn’t prevent someone else moving into the empty retail space and opening up a competing business.  No matter what you do, you may be facing more competition down the road.  The question is whether your money is better spent trying to buy out and close down this single competitor or pumping that same money back into your business, improving how you run your operating, and better preparing to compete.

My gut feeling is that it probably won’t make sense to buy out the competitor.   I would suggest that instead of buying your competitor’s business, you offer to buy out all of your competitor’s inventory at a discount.  This is much easier than buying the business itself, and you can turn around and sell the inventory in your store.   Since your competitor is in ill health, he may just want to liquidate everything ASAP and shutdown his business.

Anyhow, I hope this helps!