Making a Strategic Aquisition

Purchasing another business could expand your business overnight. It might enable you to take advantage of new economies of scale, or diversify into new areas.

But an acquisition can also bring problems, draining financial and management resources from your original business.

This article considers some of the pros and cons in expanding your business through an acquisition.

Undertake a SWOT Analysis

Acquisitions are more risky than organic growth. Be clear about what you need, and what you expect an acquisition to do for you, before investigating possible purchases. -

• What are your strengths? Can you complement them? Can you afford to risk diluting them?
• What are your weaknesses and how could you rectify them?
• Analyse your opportunities and how you might be able to take advantage of them.
• Assess the threats to your current position.

Having completed this SWOT analysis, you can assess the benefits and risks of an acquisition.

Benefits of an Aquisition

An acquisition can benefit your business by ;

1. Providing opportunities to cross-sell to one another’s customers.
2. Reducing costs - with a higher volume of activity, you should be able to achieve substantial economies of scale.

   The increased size of your business should give greater negotiating power when it comes to purchasing.

   • You should get better prices when buying in greater volume (bulk-buying). Ask your existing suppliers for quotes, so you can judge the potential savings.
   • You may be able to negotiate better terms from your bank.
3. Better use of overheads.
   
   
   • savings in central functions, such as finance, administration and personnel.
   • look for similar savings on premises, distribution, sales and marketing.
4. Diversify your Risks

   An acquisition could help you limit or offset the risks in your existing business. For example ;

   • You may rely too much on one product.
   • Some of your products may be coming to the end of their product life cycles.
   • Could help you open up export sales, or reduce your dependence on just a few customers.
5. Improving Management and Standard of Employees

   Acquisitions are often most useful when they bring in new blood — intentionally or not.

   An acquisition can fill gaps in your management team’s skills and experience. Be prepared to spend time with prospective partners, if you are planning to utilise their management skills. You need to ensure your methods and objectives fit together.

   Are key staff willing to relocate ?

Beware the Traps

If an acquisition is going to fail, it is usually because there was inadequate investigation beforehand, or no clear, agreed plan for what should happen afterwards.

Failure can be extremely expensive. Consider the possible pitfalls before making any move.

Your own business may suffer due to ;

• Your management may be tied up with the acquisition and overlook problems closer to home.
• You may well find you have increased your exposure to risk (for example, if you have borrowed heavily to fund the acquisition).
• You may have acquired assets you can neither use nor sell.

Be sure to allow for rationalisation costs when calculating the benefits you expect from any merging of operations.

• Ensure the sale and purchase agreement includes terms and conditions preventing the former business owners from setting up a similar venture again.
• It is particularly important to rule out a similar new business in close proximity to the one you take over. Otherwise you risk them winning back former employees and customers and regaining their market share.

Examine the Alternatives

An acquisition may often look like an attractive short cut to success. But you should also consider other routes to expansion.

If you are looking to expand distribution, rather than buying a company for its distribution network, contract it to do your distribution for you and get the benefits without the risks.

Perhaps a Joint Venture may be more appropriate.

• It is often cheaper to get out of a joint venture than offload a failed acquisition.
• A joint venture gives you access to the other party’s management and employee skill base, without the need to contribute to the overheads.

Growing your business by purchasing another is not as straight forward as it seems. There is more to it than going over the financial performance of the potential acquisition. We have assisted many clients in expanding their businesses. Please contact this office to discuss your situation.