We’ve often spoken about the achievements of growing your business from the ground up, building value, becoming attractive to buyers, until finally deciding on a strategic investor to come full circle through the business cycle.
But one rhetoric not often mentioned is the milestone of your first business acquisition.
People buy businesses for a variety of reasons - which are explained below - however, the main underlying factor is because of growth.
As a company, growth happens in one of two ways. Either you choose to grow organically, or you can scale up through a strategic business acquisition.
Both of which come at a significant financial investment.
Organic Growth VS Growth By Acquisition
Organic growth follows a business’ natural progression through the start-up phase to becoming profitable. Then scaling based on revenues, product and service offerings. If the market picks up, then these businesses may enjoy an unexpected increase in growth. However, they are just as tied to the markets decreases.
To counteract the fluctuations, your business should be constantly seeking out opportunities to scale. This requires you to think creatively, enter different markets, or develop different business models. While exciting, it means you’re committing to spending your hard-earned money slowly over time by reinvesting your existing profits.
Even if this is considered the ‘safe’ route, there is still risk. You’ll need to spend money in order to win business. This comes in through hiring top sales, marketing, or product people, or funnelling it through new campaigns or initiatives which may or may not pay off.
So now business owners are hemmed in by the chicken and the egg model. Do you try and grow at a normal rate until your business reaches the point where it’s both large enough and innovative enough to retain top talent? Or do you go straight to the source of talent you need regardless of your current size or service offering?
Growth by acquisition happens through carefully-considered mergers and acquisitions. We see this all the time with big companies. They seek to buy a company that offers something their business model is either missing or would enhance a current offering. Yet SMEs tend to shy away from business acquisition models due to high financial risk. If you acquire another business, you need to be prepared to withstand a significant financial chunk knowing - or hoping - that the instant ROI will far outstrip the initial investment.
Although we’re here to tell you that a business acquisition strategy, when carefully scrutinised, could act as your expressway to growth.
What is a Business Acquisition Strategy? Do I Need One?
Whether you are buying your first business or looking to expand an existing business even further, it’s important that you make the right choice on both what business you’re looking to buy, but also if it’s the right time for you to consider it. Ask yourself the following questions:
Does the acquisition make sense? And will it improve your competitive position?
What impact will it have on not only your business but your employees, shareholders, and clients?
Have you done your due diligence both internally as well as on the business you’re looking to acquire?
This introspection is important. Businesses that stuck to a careful structure were 94% more likely to be high-growth firms just three years post-acquisition.
5 Reasons for Mergers and Acquisitions
Does a merger or acquisition make sense for your firm? First, you need to decide why you want to pursue a business acquisition in the first place. Here are 5 solutions where an M&A has driven company growth.
Increase Market Share
This is the most common growth through acquisition strategies. If you buy a competitor, you are increasing your market share within a segment or a geographic location. Of course, this will boost your organic growth. If your current industry experiences low growth rates and potentially low levels of competition, this type of business acquisition can greatly improve your competitive advantage. Not to mention your profits.
Boost Your Product or Service
Perhaps there’s a critical gap in your service offering? Your business could spend hours and lots of money developing out this service. But if you don’t have the capacity, sometimes a simpler solution is to add this service to your repertoire through a business acquisition. With the added service, your business can now reach a different - maybe larger - client base, build stronger relationships with suppliers or breach otherwise closed-off areas of the market.
When you combine business activities with another key player in the game, it’s understandable that you’ll see an increase in performance, efficiency, and profitability. Two heads are better than one is the age-old saying, and by working together, you’re combining your strengths to attack a common problem. This type of acquisition is known as a strategic merger and is one of the most powerful vehicles of growth.
Attain Key Talent
With an onslaught of labour shortages affecting many industries, acquiring and retaining talented employees is a cut throat game. In some instances, businesses would rather buy out a company full of talented individuals rather than try to headhunt elsewhere. This is quite common in cybersecurity, engineering, and accounting. This type of business acquisition is known as Intellectual Property (IP) and is considered a currency of modern-day business. Acquire the necessary IP, and you’re in the fast lane for total world market domination.
Reduce Your Learning Curve
Rather than adopt a brand new business model, some businesses would rather buy an established one. This has the benefits of saving you both time during the learning process, as well as the money it would take to establish yourself as a reputable source. While technically a shortcut, it is a very effective growth strategy for businesses who have the financial capacity for a business acquisition.
Is Your Business Ready For an Acquisition?
As your company evolves, the need for acquisition arises because you’ve entered into the maturity phase of your growth. If you think you’re there, it’s time to break down your biggest opportunities, as well as shortcomings, and map out how long it would take to build what you would need to best stay on the sought-after growth trajectory. Every company has a ceiling and once you reach it, the only way to continue growth is through market share takeover.
Yet recognising an acquisition opportunity is one thing, preparing your business for an acquisition is another. A successful business acquisition starts much earlier than the actual point of sale. So if you believe you’re almost at the peak, here are three steps to prime your business for a merger or acquisition.
Step #1 Ensure You’re on Solid Financial Footing
If your long term plan is to take over your competitors, you’re going to need deep coffers to pull it off. Make sure your business is in a healthy place financially before you even consider entering a long and arduous acquisition process. It must generate enough revenue and have strong investors backing your product or service.
Step #2 Ensure the Timing is Right
If you look past your financials, you’ll need to take a deep, hard look at whether you have the capacity to acquire another business. How well-developed is your team? Where are you currently sitting in your industry’s market? If there’s a weakness in either, it might be a smart move to take a step back, build your own foundation back up before you decide to source other opportunities. Don’t underestimate how time-consuming and resource-heavy this process is.
Step #3 Ensure the Business You Want to Acquire is Right For You
An acquisition is like a marriage. Once you’ve figured out your price, your market positioning, and all the business-centric details, a lot comes down to ‘softer’ fit.
Closely analyse the company culture, leadership styles, and future roadmap as a compass to whether the two companies will be aligned. A business acquisition is never simple. And just like a marriage, just because it’s written down on paper, doesn’t mean it’s going to succeed.
While acquiring a business can be a powerful driver for growth, it does come with its own significant set of risks. A business acquisition strategy can be a powerful thing, but it’s important to understand whether it’s the right time for your business. If you notice your revenue has peaked, or your product offering is slipping behind your competition, it could be time to consider growth in acquisition. Joining forces with another player could unlock opportunities you didn’t know your business was capable of.
Unsure? talk to an adviser, we can help you analyse your business and help you decide which strategic foot forward is right for you.
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At Exit Advisory Group we help entrepreneurs maximise company value and exit at the top of their game.
We do this by giving business owners the tools and strategies to design more profitable, efficient and enjoyable businesses to own - that are also less dependent on them. When they choose to exit, they are in the best position to unlock the wealth in their business and be rewarded for their hard work.
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