Should You Buy Another Business?
An acquisition can be a faster way to growth, if you manage risk wisely.
There often comes a time in the life cycle of a business when the hyper-fast growth enjoyed in the early years tapers off. While some would be pleased with stable revenue and profits, it’s just not good enough for true entrepreneurs who see stability as a sign that it’s time to take aggressive action.
Every entrepreneur knows there are basically two ways to grow a business. Organic growth is when the revenues and profits of a business are built through investment in internal resources. Organic growth works, but if speed is what you’re seeking, inorganic growth is the answer. Inorganic growth means “acquisition,” and it can be an effective way of building your business quickly.
Growth through acquisition can be very good but, as with any business, there is risk. While entrepreneurs are a smart group of people, very few automatically know how to avoid risk when buying a business. Let’s look at some of the things you can do to maximize success as you grow your company by acquiring another.
3 Key Questions
First, ask yourself the three questions below. Remember, the goal is a successful acquisition, so invest the time to really think through the questions. Be brutally honest with yourself when you answer.
Is my current company in good shape? Although there are ways to acquire other companies to improve your operational and financial issues, acquisition can also magnify flaws. If an unplanned opportunity to acquire a competitor presents itself, by all means consider it, but know that timing matters. A great acquisition when your company isn’t strong enough to absorb another can destroy both companies.
What do I hope to accomplish by acquiring another company? What is your long-term vision for the company and yourself? What is currently missing that can be acquired to help you achieve that vision? New products or services? New customers? Employee talent? Expansion into a new geography or industry?
Do I have the resources to pull this off? Acquiring and integrating another company—while keeping your existing business successful—can be demanding. Don’t let your desire for expedited growth jeopardize your current business activities. You’ll need sufficient financial resources, time and personnel both during the acquisition and during the process of integrating the two companies.
How to Get Started
If your current company is strong enough to weather the process, and you have ample resources and a firm understanding of goals for the acquisition, it is time to get started.
Assemble your team of advisers. While every deal has different requirements, your team will probably include an M&A professional to help identify and approach target companies, an accountant to help with financial due diligence, a management consultant to help assess the organizational and cultural fit of the two companies, and an experienced transaction attorney.
When you answered Question No. 2 earlier, you defined the specific characteristics of potential target companies, so you know what you’re seeking and the benefits a successful acquisition can bring.
It may take some time to find the right company to acquire, but don’t rush your analysis and evaluation of candidates. Be patient. A good match will add to your company’s strengths and minimize its weaknesses. A bad match can undo what you’ve worked so hard to achieve.
Once you’ve identified an acquisition target, take the time for continued assessment. Refer back to the list of specific characteristics you created while answering Question No. 2 and compare the target to your list. How closely does the target align with your growth vision?
Your goals and initial due diligence will lead you to a price you are willing to offer. Unfortunately, most business owners overvalue their businesses, and acquirers frequently value the same company at far less. Work to understand what is important to the acquisition target company’s ownership, and rely on the expertise of your advisory team to help you structure a deal that works for all. It’s extremely important at this stage to remain focused on business needs. Don’t let emotion, excitement or ego lead you to overpay.
Search Google for the success rate of mergers and acquisitions, and you’ll find that a very high percentage fail. Many times failure occurs because a plan to integrate the companies is not well thought out or implemented. To increase your chance of success, work with ownership and leadership of the target to create an integration plan before you sign on the dotted line to finalize the transaction.
Growth through acquisition is not without risk, but it can be the best way to build your company quickly. Buy another business when it fits with your long-term vision for your company and your personal goals. Just remember that a successful acquisition isn’t just defined by a good buy; a success is when the two companies are stronger together than they were apart.