Given the challenges of the current economic cycle, the thought of acquiring another business is probably not on your radar right now. However, acquisitions can be excellent ways to quickly increase revenues, expand products or service offerings, improve market reach and increase the value of your business.
With record low interest rates and lower valuations, virtual CFOs and accountants will agree that businesses with solid balance sheets are in a great position to consider such a strategy.
There are two primary ways for companies to grow their business. One such way is by increasing sales, a strategy that is often referred to as internal or “organic” growth. The other is through buying or acquiring another business.
One way to think of these two growth strategies is ‘the turtle versus the hare’. Organic growth is usually slow and steady, achieved over a number of years through disciplined sales, marketing and customer service efforts. Conversely, an acquisition can enable your business to achieve explosive growth literally overnight.
To gain a better understanding of how growth through acquisition can affect your business, let’s take a closer look at its pros and cons.
Growth at Warp Speed
The biggest benefit of an acquisition is the speed at which it enables you to achieve growth. If your business achieves $2 million in sales per year, for example, and you acquire another business with $2 million in annual sales, you’ve just doubled the size of your business, at least from a revenue perspective.
An acquisition can also be an instant gateway to new geographic markets and new customer segments.
For example, if you currently do business only in one state, you could expand your geographic footprint into other states by acquiring another business outside your geographic area. Or, if you only market your products and services to a narrow segment of customers, you might be able to attract new segments via what’s known as a horizontal acquisition, or the acquisition of another business that’s similar to yours—including competitors.
In contrast, a vertical acquisition is an acquisition of another business somewhere along the supply chain. For a manufacturer, for example, this might mean acquiring a supplier in order to reduce costs and firm up the supply of critical raw materials.
Of course, the rapid growth and expansion opportunities presented by an acquisition come with a price, and buying another business can be an expensive proposition. Small and mid-sized businesses often don’t have enough liquid cash on-hand to complete an acquisition in cash, in which case the acquisition will have to be financed. Despite this, record low interest rates are certainly a big help for any business willing to take the plunge.
Aside from having a sound business management system, you should perform a detailed financial analysis that compares the cost of the acquisition and anticipated ROI with what it would cost to achieve similar growth organically before considering acquisition. Organic costs would include sales and marketing, human resources, R&D and product development costs, as well as the amount of time it would take to achieve this growth internally compared to achieving it via an acquisition.
In Search of Synergies
Another big benefit of an acquisition is the opportunity to realise synergies between businesses. In other words, are there areas where the combined enterprise will benefit your businesses in ways that neither business could have benefitted on its own? Increased efficiency, lower overhead, greater scale and shared resources are a few examples of these types of synergies.
Without question, one of the biggest potential drawbacks of an acquisition has to do with the cultures of the merging businesses. Many acquisitions that made perfect sense on paper have failed miserably due to culture clashes. Therefore, it’s critical to perform financial and cultural due diligence before moving ahead with an acquisition.
There’s no question that an acquisition strategy may provide business owners an opportunity to grow their businesses very rapidly. With a low interest rate environment and the valuations of many businesses currently down due to the economic downturn, this could be a great time to explore this growth strategy.
However, there are some potential landmines awaiting unsuspecting business owners who haven’t done their homework, so thorough preparation is still critical.