In the fall of 2008, I bought a poorly run wholesale souvenir company whose products were popular with gift shops. I've since stabilized the business and am now looking at expanding. There is another company that I have not viewed as a competitor, although its products are equivalent in price and quality to mine. Unlike me, the owner has sold the products directly out of her small shop, as well as to a few large retail customers. Now she has put the business up for sale, at a much-inflated valuation. I have gotten in touch with the broker and am considering buying it as a defensive move. I fear that if it is bought by a company with distribution and sales reps in my region, I'll face stiff competition that will cut into my revenue and erode most of my profit. Even if I get the price down, I'll have to dip into my savings to do the deal. Do you think I am being overly pessimistic, or are my fears justified?
You should never buy a business for the wrong reasons, and buying one to stifle competition is definitely a wrong reason. As I told the woman who sent me the query—I'll call her Rebecca—such a move doesn't really protect you from anything. After all, what is to stop someone else from coming along and starting a business with the same characteristics as the one you've bought defensively? You will have wasted your money and, more important, your time and energy, which would have been better spent working on your own business.
Besides, you should never fear competition. Competitors can't hurt you. You can only hurt yourself. If you offer better products and better service than anyone else, you will attract plenty of customers. I think you need competitors, and it doesn't bother me to have strong ones. They expand the market, and they keep me on my toes.
That said, you shouldn't ignore the potential sale of a competitor. I told Rebecca she should see this as an opportunity to increase her business. The broker had told her that the owner was selling because she was spending all of her time on another business she owned. If she's not paying attention to her customers, now is the ideal time for Rebecca to try winning them away.
Please send all questions and comments to AskNorm@inc.com. Norm Brodsky is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. You can follow them on Twitter at @normbrodsky and @boburlingham. Their book, Street Smarts, is available in paperback.