In my business growth strategies post I briefly highlighted three routes we commonly see with clients for growing their businesses. In this post I aim to explain how to grow through acquisition and give you some deeper context to this route before you choose it.
Why choose growth through acquisition?
There are some compelling reasons you may evaluate this growth route – but, it is also not without it’s risks (but I will expand on that later):
- There are an increasing number of baby boomers selling their businesses – so now maybe the time where pricing and deal structuring can be advantageous for the buyer.
- If you are seen to be a capable, growing business – you may get access to better routes for capital – from banks, fund providers, and private equity
- Once word gets out in the market that you are an “acquirer”, possibly more retiring entrepreneurs will seek you out to help with their liquidity
- Top talent is easier to attract when you are a growing business (and also if you acquire an attractive business)
- By acquiring a business, the cross-selling and cost savings can have a huge impact on your profits
However – all of the above is great in an ideal world, but we all know that we don’t (as small businesses) always live in that world. So, the advantages or draws of acquisition need to be weighed up with the potential pitfalls.
Dangers of growth through acquisition
One of the biggest issues private, small businesses have is that they have fairly limited resources. Compared to larger public companies – so the risks can be amplified.
Three of the (many) mistakes for companies who decide to grow through acquisitions include:
- Taking your eye off the ball
The research and due diligence involved in seeking out deals can be enormous. Studies show that more than 50% of buyers spend between 10 -20 hours a week searching for 6 months to a year to find a suitable business to acquire. That is a lot of time spent not focussing on your current business. So – beware.
- Not paying attention to the due diligence
Finding a deal can be exciting and exhilarating – but sometimes when you have too much time and focus invested in a deal – you could end up just wanting to close A deal (which may not be the right deal for you). Always check-in with what the facts say before making a decision.
- Not evaluating the soft points
A supporting warning which goes in tandem with number 2 above. While facts on paper are important – always check the ‘soft points’. Look at the people and culture of the organisation – are they a great fit with you too?
The degree of uncertainty that comes with acquisition more often than not ‘rocks the boat’ for both your business and the acquired business. The people, who hold everything together, will need to feel secure as roles and expectations alter.
Is it the right route for you?
Growth through acquisition can be a really viable option for small and medium-size businesses, even when weighing up the risks.
I guess the question really is: is it the right growth strategy for your business? Or are you better off expanding in more organic ways – by opening up satellite locations, franchising, or focusing exclusively on more productive or aggressive sales and marketing channels?
To be honest, for every unique business situation there’s truly no “right” answer that fits every circumstance. But we can review the pro’s and con’s of acquisition to give you some better insight into whether its suitable for you or not.
The argument FOR acquisition
Unlike slow and steady organic growth, growth through acquisition or a merger is generally much faster. If you do it right – it can also yield a number of significant benefits. Growth this way has a two-fold impact:
- You will be growing your: market, online presence, brand reach, audience and potentially your supply chain
- You will also be eliminating or overtaking one of your biggest competitors, either by acquiring them directly or by acquiring one or more smaller competitors until your business is the largest in your competitive market.
The argument AGAINST acquisition
While one of the pros of acquisition is that growth is faster and can yield quick results… it can bring up some management issues.
The internal culture or environment within the two businesses before and following an acquisition can present a number of challenges that could hinder that rapid growth or plant the seeds of future failure.
If the acquisition (or, indeed merger) means that there needs to be reorganising of the workforce and/or management team in one or both businesses, you may have a significant amount of stress and hard feelings to work through in the minds of those who stay (or even, for those that have to go).
So, coming back to one the risks I mentioned above – not evaluating the soft points. It’s these soft points that can mean DO or DIE when it comes to acquisitions.
Merging two distinct company cultures, methods and systems will always present challenges, but a successful acquisition needs to get through these and other potential problems quickly and effectively if it’s going to successfully grow and evolve from the process.
Patterns of growth through acquisition
There are broadly two patterns you can take when choosing to grow by acquisition.
If your objective is to capture markets held by smaller competitors in local areas in their segment, you may opt for what’s called a ‘spoke pattern’ of growth: you will buy smaller rivals who lack big investment to grow, but have good market reputation compared to the bigger companies.
The ‘hub pattern’ of growth through acquisition strategy is one you would follow where one business from one particular country aims to expand into another country. It can buy the stakes of a big business in that country, thereby establishing a presence through its acquired brand name.
Choosing what is right for you
There are many aspects to consider when growing a business, so do not be alarmed at the many options available to you other than organic growth. If you are in a position to have the investment and/or resources to consider an acquisition proposition – then be sure to weigh the situation up carefully.
We would be happy to help if you needed some guidance on evaluating the financial health of a prospective business purchase – or indeed, if you would like to prepare your business to be attractive to a buyer.
Just give me call on 01788 577613 or email me direct on firstname.lastname@example.org.