There are a lot of benefits that come with business acquisitions, and they’ve long been used as a way for businesses to grow, innovate or gain a competitive edge. But, not all acquisitions are created equal, and success isn’t guaranteed. The success of an acquisition depends on a lot of things, including the strategy that you choose.
What is an Acquisition?
An acquisition is when one business purchases another, in the hope of achieving a specific goal, such as growth, innovation or market expansion. By acquiring the business, you take complete ownership. Acquisitions are used as a way to gain access to new markets, technologies, talent or products, in a way that’s quicker than your business developing them itself. Acquisitions can be friendly and welcomed, where both businesses agree to the terms and are supportive of the two businesses coming together. They can also be hostile, which is when the business being bought is resistant to the acquisition.
So, why does one business choose to acquire another? It’s usually driven by a specific goal. For example, enhancing competitiveness, economies of scale or securing a stronger market position. You might acquire a smaller competitor to reduce competition, or you might acquire startup businesses so you can use their innovations to improve your own products or services.
When successful and managed well, acquisitions can add a lot of value to a business.
Six Acquisition Strategies Everyone Should Know
There are various types of successful acquisitions, all of which work in slightly different ways, with slightly different purposes. Here are six of the most common acquisition strategies.
Consolidating to Remove Excess Capacity
As industries grow and mature, there’s often an issue of excess capacity, but this type of acquisition aims to solve that. By merging businesses together, it’s possible for you to eliminate redundant operations. For example, unproductive branches or overlapping sales forces, reducing supply excess. If there’s too much supply and not enough demand, all businesses are at risk of struggling to keep revenue coming in, but consolidation takes away some of the competition. However, though this strategy can benefit entire industries, making sure that the acquiring business captures enough value to justify the investment can be challenging.
Improving Business Performance
One of the most commonly used strategies is centred around improving the target business’ operational performance, usually by reducing costs and increasing revenue, in a bid to improve margins and cash flow. This approach is all about transforming an underperforming business into a more profitable venture. For example, you might acquire a business that has a lot of potential, but currently has less than desirable margins. By focusing your acquisition on improving business performance and implementing a range of processes to enhance efficiency, it’s possible to increase its value dramatically. This is something that tends to be easier with businesses that have low margins and low returns on invested capital. It’s not necessarily impossible for high margin, high return businesses, just considerably more difficult.
Quickly Gaining Skills or Technology
It’s not uncommon for an industry to evolve extremely quickly, especially if market and customer demands are regularly changing. Businesses often need to build new skills and implement new technologies to keep up, but this is time consuming. In the time it takes to develop a new skill or capability, the industry could have moved on once again. To avoid being left behind, you might consider acquiring a business that already has the skills, technology and innovations that you need. This enables you to steam ahead with technology and innovation, without having to put the time into developing it yourself. You can simply gain access to assets via an acquisition.
Accelerating Market Access
Many small, though innovative, businesses struggle to reach their full market potential when they first enter a market. This is largely due to limited distribution networks or resources, which larger businesses tend to have more of. By acquiring another business, it’s possible to use their established networks, resources, and sales channels to boost revenue. You might have a large business, and then choose to scale smaller businesses in the same industry, before adding those to your sales force. You can utilise the strengths of small businesses – for example, they might have a loyal customer base in a specific region, giving your larger business a boost.
Making the Most of Industry-Specific Scalability
If you’re working in an industry with high, fixed costs, economies of scale can be a driving force for acquisition. This is when a large, successful business acquires a smaller, similar business in a bid to save money on costs. For example, you might acquire smaller businesses that provide the same products as you and share platforms, rather than creating an entirely new platform for each, which reduces costs.
Growing Promising Businesses Early
Acquiring promising businesses early in their lifecycle can lead to excellent results, but only if the acquisition is managed effectively. This acquisition strategy requires foresight, patience, planning and the ability to nurture business growth. If a relatively new business to the industry has the potential for a huge amount of success, acquisition allows you to become part of that success, reaping the financial rewards. Success with this type of acquisition strategy often requires making calculated risks and focusing on a long term goal, as success takes time.
Common Acquisition Challenges
Here are some of the challenges you might face when you’re going through the acquisition process.
- Company Culture Differences – When two businesses come together, there’s bound to be differences in company culture, and this can lead to problems if the differences aren’t addressed. Differences can include anything from varying work styles, different management approaches or teams that have different ways of communicating.
- Financial Strain – Acquisitions often require significant capital investment, which can put a strain on the acquiring business’ finances, especially if capital is somewhat limited to begin with. If the expected benefits take longer to materialise and revenue doesn’t increase quick enough, it could have a knock on effect on the other business.
- Problems Integrating – The integration phase once the accusation is in full swing is often the most challenging part, and it can determine how successful the acquisition ends up being. Difficulties in merging systems, processes and teams can lead to delays, overspending and inefficiencies. This is why it’s important to create a detailed plan before the acquisition is finalised, outlining timelines, responsibilities and integration plans.
- Unrealistic Expectations – A number of acquisitions fail because the expected benefits, such as cost savings or revenue growth, don’t happen in the way they were expected to. This could be because your expectations were too high, you overestimated the abilities of the business you’re acquiring or because an unexpected hurdle arose. It’s important to base your expectations on realistic assumptions using facts, figures and projections.
- Overestimating Value – Overestimating the value of the business you acquire can be hugely detrimental, especially as you probably acquired the business in the hopes of boosting revenue. The case is the same if you underestimate potential risks, leaving you with costs and financial burdens that you didn’t expect. It’s important to assess the business’ real value, factoring in future revenue projections, costs and market conditions.
A lot of acquisition challenges can be mitigated through planning and expert help. This is where Profici comes in. As business growth partners, we understand the planning, costs and hurdles that come with any acquisition strategies, but we use our knowledge and experience to guide you through the process. Get in touch to find out more.
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