When to Consider Using Acquisitions as a Growth Strategy
February 28, 2016
You want to grow your business, right? Well how are you going to do that? You could do it the old fashioned way by gradual, incremental expansion; but there’s an alternative that may help you grow your business more quickly and very possibly with less risk and expense – namely, by acquiring another business.
With that second alternative in mind, you may now be asking yourself: “So when should I, as a business owner, consider acquiring another business as a way to expand or improve my own business?”
Consider that buying another business could very well be the best possible way for you to do one or more of the following:
(1) Enter a new line of business that is complementary to your current business or that minimizes overall risk by diversifying your company’s business lines;
(2) Achieve certain advantages of scale (e.g., to achieve lower manufacturing or distribution costs per unit);
(3) Gain access to new contracts or cash-flow opportunities that wouldn’t otherwise have been accessible (e.g., by buying a company that has access to a government contract vehicle through which the government will be rewarding lucrative task orders; or buying supply contracts from a competitor that allow you to expand the total volume of goods you supply to customers);
(4) Obtain valuable intellectual property and technology (e.g., by buying a company with a critical patent that, when integrated into your product, would make your product the market leader in some respect); or
(5) Obtain the services of a team of employees who have unique expertise or hard-won access to key decision-makers.
But, before pulling the trigger on an acquisition, let’s consider the alternative, which is to grow your business organically. To do so, you’ll likely need to obtain financing, make expensive capital expenditures, expand your marketing and sales efforts, earn and nurture customer loyalty, hire more people, develop new expertise, and build internal systems and procedures, among other things. None of this is impossible or unusual, but consider these challenges:
- Lenders may not be willing to finance organic growth into a brand new area in which your company is untested, given the unpredictable expense associated with this type of growth;
- Capital expenditures for new equipment and facilities could detract from future expansion of your existing core business and can be very difficult to finance and time effectively;
- Ramping up sales efforts, winning customer loyalty, and establishing new distribution channels can be a costly and risky undertaking, particularly in competitive industries where your competitors have had a head start;
- Finding and hiring skilled people and developing and protecting intellectual property can be tremendously challenging, especially in tech-intensive business lines; and
- As any senior executive can attest, putting new internal systems and procedures in place requires considerable planning and often involves time-consuming trial-and-error to get right, as systems typically need to evolve considerably before they are truly effective.
By contrast, for a number of reasons, acquiring another company or business may be the quickest and most sensible approach to growing your business. Some of those reasons are:
- Lenders are often more willing to finance an acquisition than a long-term organic growth plan, because the past performance of the target company can give them comfort in terms of likely future performance and the availability of collateral;
- You can avoid having to make expensive capital expenditures and paying for costly marketing campaigns;
- The expenses you’ll incur in doing an acquisition are, in many instances, more predictable and lower than what you’ll need to expend to grow your business organically; and
- An acquisition will typically be a faster route to growth insofar as the target company already has existing distribution channels, market share, customers, systems, employees, intellectual property, and the like.
Thinking the acquisition route is something you’d like to explore? At the very least, you should be well-versed in the pros and cons for your particular business, and those pros and cons are in many respects both financial and legal. Circle up with your business and legal advisers, begin the process of assessing the best way to grow your business, and consider seriously the possibility that an acquisition may be the best and quickest way to take your business to the next level.