Advivo Business Advisors and Accountants break down the pros and cons of business acquisitions to scale up your business.
There is more than one way to scale up a business, but the main ways are by growing organically business acquisitions/mergers, or franchise/licensing.
Depending on the stage your business is at and the level of market saturation for the products or services that you sell, it may be faster, easier, and cheaper to grow by acquiring a competitor than it is to grow organically or considering licensing if you have a unique and sustainably different product or service. As franchising / licensing is a whole new subject, we shall ignore this option for the sake of this correspondence.
Business Acquisitions: Key Considerations
Advantages of using business acquisitions to grow quickly:
- Quickly gain a larger market share / gross sales.
- Gain economies of scale.
- Adding key personnel with industry experience is not readily available in the labour market.
- Access to IP/processes held by the other business that can be overlaid onto your own to create more efficiencies.
- Move upstream or downstream in the supply chain without having to build out your team capability and processes into an area that they are not experienced in.
- Remove a competitor
- Acquire additional skills and expertise.
Disadvantages of using business acquisitions:
- If the acquired company is not onboarded right, it can cause a massive disruption to both parts of the new combined business.
- Acquisitions cost real money upfront (or deferred via finance) rather than sales/marketing costs spent over time.
- Whilst organic growth can be relatively easily tweaked as you go, an acquisition can feel a bit like you are risking a lot more because you are adding so much all at once. A good way to hedge against this is to ensure you do your due diligence upfront to ensure that the acquisition is a “good fit”.
How to determine if a potential acquisition will be a “good fit”:
- Brand alignment – does the public perception of the business approximate that of your own or are there big differences in how they are perceived? The closer the alignment, the easier it will be to integrate unless they will remain as two distinct brands servicing different segments of the same market.
- Cultural alignment – “doing things the same way” will make it easier for your combined teams to work together and deal with any team crossovers planned across the two businesses after acquisition.
- Pricing – does the acquisition target sell the same services at similar price points to your existing business? If their prices are much lower then you may have difficulty increasing their prices to match yours without losing a percentage of the customer base that you are paying for.
- Systems and processes – is the acquisition very systemised? The more systemised, the easier it will be to integrate.
- Key person dependence – does it run itself or is there a queue at the door of the current owner who is the main decision-maker for everything.
- Economies of scale – will you be able to remove major elements that are duplicated across both businesses or are these unable to be removed (eg lease commitments, multiple sites, duplicate staff roles that can be combined).
If you’re considering acquisitions to grow your business, Advivo’s corporate advisory division can assist you in sourcing pre-qualified and appropriate businesses to add to yours, and then assist with the due diligence, valuation and purchase negotiations on your behalf. If you would like to better understand your options, please contact us today.
