Strategic Acquisitions: The Benefits, Risks and How to Decide When Your Business is Ready

A guide to weighing up the options when deciding to expand your small business by taking over another

Strategic Acquisitions: The Benefits, Risks and How to Decide When Your Business is Ready

Business acquisitions can be very risky with absolutely no guarantee of success.

A successful acquisition could see your business blossoming overnight.

It may allow you to

  • Move into new areas
  • Avail of larger economies of scale
  • Build a larger and stronger workforce, customer base, or management team

However, a poor acquisition may bring many drawbacks and unwanted consequences.

  • You may have to siphon off your capital and your management resources
  • It may cause low morale as staff fear for their jobs
  • A hostile takeover may lead to division among ‘old’ and ‘new’ staff

When deciding on a business acquisition, it’s imperative that you establish precisely what benefits it will bring, and what hidden costs it comes saddled with.

This guide seeks to help you assess the arguments for making an acquisition and how to use one to grow your business, improve your management team, and more.

How do I know when to make an acquisition?

Firstly, you need to precisely define your aims for the acquisition.

Acquisitions are different to organic growth precisely because they come with some huge risks attached.

Unless you fully understand your own aims, you find yourself making a fraught decision that you didn’t need to make and may ultimately regret. You should consider:

What your strengths are

Ask yourself: How well is your business doing? It’s incredibly important to properly evaluate your company’s market position and its market share. Make sure to be realistic with where your business is actually at, (not just where you want it to be.)

Assess the strength of your workforce and the size of your working capital. How good is your technology and production methods – will you be able to cope with taking on more work.

What your weaknesses are

Make sure to analyse how stable your finances are. Can they be overstretched and actually accommodate an acquisition?

The sudden and immediate growth of your businesses will also be challenging for your management staff and your general team.  Are they strong enough for the task or will it over burden them?

Keep a keen eye on the markets also, could your market share be rocked by a large financial commitment?

What the opportunities are

Do you have a solid base/market position that could be expanded upon? Assess the experience of your team in aligning with new businesses.

Consider whether you could actually get more out of your resources already (money, premises, distribution network, etc).

What position are your competitors in? Are they vulnerable?

What threats there are to your current positions

Consider the strength of potential rivals. Is the competition strong/fierce, or growing?

And what about the market, is it stalling, or going into decline?

Are you over-dependant on a particular employee or customer?

Can your cost pressures be covered by your customers?

For a guide on valuing businesses, click here.

How can an acquisition grow my business?

Acquisitions can help the growth of your business beyond just immediate expansion.

If an acquisition works, it can bring simultaneous benefits to both your own business and the business you’re buying – giving you added opportunities for expansion.

In particular, it can help your business by:

Giving you a better public image. The bigger a company, the more brand recognition it receives, and the more entrenched/reliable it can seem in the eyes of the consumer. As result, you’ll develop more brand loyalty among customers.

Giving you the opportunity to cross-sell to your different customer bases. Consider whether the acquisition is really compatible with your current remit if you want to explore this option. If successful, if can open up previously unavailable markets for your business.

Giving you more opportunities for product development. More customers give you a greater likelihood of a successful product launch. Similarly, you have a greater base if you want to sample potential new products

How can an acquisition reduce my costs?

An acquisition can seem to offer huge costs to your business – but a good one can see you spending less and getting better deals.

With a larger business comes larger economies of scale that can be achieved.

An acquisition can help you reduce your costs by:

Making better use of overheads. You might be able to combine your assets, such as staff, premises or distribution chains.

This can make them both smaller and stronger at the same time as you’re pulling all of your collective resources together.

If the acquisition is in the same line of business, you can save on manufacturing and assembly – and even if not, you can still share some resources such as premises or distribution.

Giving you more negotiating muscle.

Buying in bulk will allow for greater savings, and banks will often negotiate better terms for larger businesses.

How can an acquisition allow me to diversify/cut risks?

By giving you access to more resources, and a more wide-ranging remit, an acquisition can help you target the weaknesses and shortcomings of your current business.

In particular, you can cut risks with an acquisition by:

Diversifying your product line. If your business is over-reliant on a single product or service, or if your products are reaching the end of their life-cycles, an acquisition may give you the chance to bring in a greater variety of offerings.

Diversifying your market. If you’re over-dependant on your customer base, it could allow you to access an entirely new one such as opening up export sales.

Spreading your workload. If your business is season-dependent, buying a business that products or services are catered for the Christmas market could give you year-round custom if your current offering is geared towards the summer market.

What other benefits can an acquisition bring?

A good acquisition isn’t just a matter of buying a business – it gives you access to all the benefits that business currently enjoys.

Buying up your competitors gives you access to all their assets – machinery, workforce, et al – likely at a cheaper price than acquiring them independently.

Similarly, you’ll often improve on your own distribution network as instead of building up one from scratch, you can make use of the sales force/outlets the acquired business already has in place.

Obviously, you’ll also have a better employee base with an increased number of staff with often varying skills to what you already have.

How can an acquisition help me defend against competitors?

A larger company with more resources and market share will always stand up better to competition – but an acquisition can also be a more targeted move to block competitors.

In particular, it can help your business by removing any potential price brakes/freezes.

Acquiring a competitor gives you greater control over your prices – you can raise them, or keep them from being undercut.

It can prevent competition for resources that can see costs sky-rocketing.

Finally it can protect a trading partnership, acquiring a competitor removes the threat of external competition to the partnership.

How can an acquisition help me build a better management team?

An inevitable part of acquisitions is the influx of new people coming under your responsibility and leadership.

You can use this opportunity to build a stronger management team – invigorated by those with differing areas of experience and skill sets.

Assess what skills these new staff members have and see do they differ from what your original staff have.

The “new” staff can often provide a fresh point of view and come at things from different angles.

However, be careful to spend time with prospective partners as their agenda might actually be totally differ to your own.

For a guide on communicating with and motivating your employees, see here and here. For more on teambuilding, read our guide here.

What are the common pitfalls associated with acquisitions, and how can I avoid them?

Acquisitions are one of the most risky moves a business can make, and the price of failure can be very high.

Unless you’re totally aware of the potential drawbacks, and have a clear plan of action, an acquisition could end up as a very expensive albatross around your neck.

Some particular risks you should be aware of:

It could impact badly on your own business’s performance. 

You might be making your own business vulnerable – if you’ve borrowed a large amount to finance the acquisition, for example. Your own resources could become so engrossed with the acquisition, that they might lose track of other more important objectives.

Additionally, you might have no use for the assets you acquire, they could become idle and may be unsellable.

The acquired business could perform badly.

You might not have the skills or experience necessary to run the new business and your staff could be even more unprepared. You could also lose employees integral to the success of the business if the acquisition is particularly aggressive.

Hopefully you can prevent this problem with offers of better contracts with more bonuses.

You might face issues that were unforeseeable prior to the acquisition – rising supplier prices and market downturns, for example.

Merging the businesses could prove problematic and costly.

Bringing two business cultures together is not always a smooth process – it can take a long time, and pose a major disruption to your operation.

Staff might resist moving, or fight against the changes you try to enforce. Redundancies can also cost you a lot of money – and raise dissent among your workforce.

You could face sudden and unforeseen competition.

The former owners could set up a similar venture again – make sure the sale and purchase agreements contain clauses to prevent this.

New and similar business at close quarters could steal former employees and customers – make sure you are aware of this risk.

What are the alternatives to acquisition?

An acquisition is always a risky move but it’s not the allow method of expanding your business.

In particular, you could consider:

Building a similar business from the ground up. This could save you money, and allow you to avoid any perceived pitfalls associated with buying and merging with an established company.

Sign long-term contracts with your target company. By getting a company to distribute your products for a share of the profits, say, you can reap benefits whilst avoiding the costs of buying out an organisation.

Forge a joint venture with your target. You can gain access to resources and skill bases without needing to pay for the overheads. They are also much easier to get out of if times grow tough.

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