Buying an existing business: Identifying the competition

You will need to discover whether the company has any competitive advantage and determine its current percentage of market share.

Unless the seller is operating in a national or international market, prepare to do some homework about the competition and the industry in general. Industry and trade associations usually do not take strictly local data into consideration when compiling market data, unless the association has a primarily local membership. For example, real estate associations maintain intense and accurate local data. But for the most part, industries will not readily supply local market data.

However, a little bit of effort, some coins for the photocopy machine and access to the Internet provide substantial data. The simplest source for looking up competitors is the Yellow Pages. Many local libraries maintain back issues of these telephone directories in hard copy and on microfiche.

When reviewing the data, count the number of competitors listed by year. Are their numbers growing? Are they growing or declining in any particular area of town? Who pays for larger advertising space? Is there more or less promotion from one year to the next? A five-year comparison should be sufficient.

A second major source of information is the "County Business Patterns" report, published annually by the Bureau of the Census. All businesses fall into one of 99 categories. You will find sales performance, number of businesses, number of businesses by size of work force, payroll and more. A third major source of competitor and industry performance information is the Economic Census Data published by the Bureau of the Census in the third and seventh years of each decade. The reports expand on the information of the yearly business patterns report, and include a detailed breakdown of categories and subcategories of industries. This information is generated on the state and national levels.

Finally, every state has a department charged with the responsibility to collect, report, audit and issue reports on the collection of that state's sales taxes. These state departments of revenue issue periodic reports on sales and tax collection performance by industry. Contact the nearest office of your state's sales tax collection agency to learn more about data available for public distribution. Economic data from the Bureau of the Census is available online or at most libraries. For more information on industry comparisons go to our chart.

Develop your competitive strategies after learning the competitive environment and discovering the focus on loyalty to the customers and the levels repeat business and good customer service.

If there is friendly competition, the seller may have a cooperative relationship with competitors, in which the businesses refer customers to each other if a product or service is not available where the customer first appears.

Quite often, this relationship exists where competitors can profitably co-exist. At the other extreme is a fiercely competitive market in which, perhaps, one business may engage in predatory pricing designed to steal away another's customers.