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Business Acquisition: The Pros and Cons

Is acquisition the correct avenue to pursue for your business? In this guide, we discuss what business acquisitions are and the pros and cons of pursuing them.

Business acquisitions can accelerate your organisation’s growth and gain critical advantages within your target market, but acquisition is not a silver bullet. Companies can quickly find themselves taking on too much debt or botching their post-acquisition integration plans.

Is acquisition the correct avenue to pursue for your business? In this guide, we discuss what business acquisitions are and the pros and cons of pursuing them.

What are business acquisitions?

Business acquisitions are where one company purchases another. Whilst there are many types of acquisition, the principle is the same. A business acquisition means one company is purchasing another.

Following the purchase, the acquired brand may exist as a subsidiary if it has influence within its market. It may also operate semi-independently from its new parent company. Alternatively, the brand may disappear entirely and be absorbed into the purchasing brand.

Currently, the UK is experiencing a booming market compared to historical levels. In 2022, 2,099 merger and acquisition deals were completed, representing £97.4 billion.

Merger vs. Acquisition

These two terms are often used interchangeably but are not the same. An acquisition is where a company purchases another and absorbs it as a subsidiary.

On the other hand, a merger is where two companies voluntarily agree to pool their resources to achieve a shared vision. Mergers will result in a new legal entity, whereas an acquisition will see one legal entity disappear.

Why are business acquisitions important for growth?

Of the millions of UK SMEs, 79% reported profitability in 2022. Despite these promising figures, it can take years to double or triple the size of your company. Acquisitions offer a shortcut to acquiring another company’s customers, assets and talent.

Some of the top reasons why acquisitions are a viable growth strategy include:

  • Increase your existing market share.
  • Break into another geographic market.
  • Eliminate the competition.
  • Diversify your products and services.
  • Acquire new assets.
  • Create synergies throughout your systems and processes.
  • Reduce your overheads.
  • Gain intellectual property.

All this enables you to sharpen your competitive edge and increase your chances of reaching your long-term goals.

Pros of business acquisitions

Business acquisitions can be an asset to your organisation, but only with strong leadership and an intricate strategy.

So, why are business acquisitions so valuable?

Rapid growth

The most significant advantage of business acquisitions is the opportunity to achieve rapid growth. Regardless of the type of acquisition, businesses that acquire other companies can quickly enter new markets, expand their customer base and access new distribution channels.

Some examples of how acquisitions can supercharge your growth include:

  • Purchasing your primary competitor.
  • Buying into a new market.
  • Assume control of your industry’s supply.
  • Gain control of distribution.
  • Poaching talent through acquisition.

Diversify your business

Acquisitions are often made as a way to diversify companies. Diversification through increasing your product and service range works on an offensive and defensive level:

Offensive – Increase your number of revenue streams and exploit underserved markets.

Defensive – Gain exposure to other industries to reduce reliance and prevent microeconomic problems from impacting your profitability.

Diversification can happen by moving into entirely new industries or bolstering your geographic reach. It’s the easiest way to confront industry-specific challenges and prevent those worries over macroeconomic downturns.

Access new technologies

Technology is everything, but you may be disadvantaged if your competitor already has a patented piece of technology. By acquiring a company with exclusive technology, you can access it for your own needs.

For example, Apple purchased the music recognition app Shazam Entertainment Ltd in 2018 for an estimated USD 400 million. This strategic acquisition of Shazam allowed Apple to improve its audio offerings by integrating Shazam’s music recognition technology into its ecosystem.

Today, Shazam operates as an independent app, but it’s also completely integrated into Apple Siri, thus increasing the utility of Apple’s services for its customers.

It’s an example of how acquisitions can be used to innovate without relying on your staff to develop something incredible.

Increased market share

Every UK firm wants to dominate its industry. Being the go-to name for a product or service is the motorway to success, but it depends on market share.

Business acquisitions allow you to swallow up a company and access its customers and capabilities. By removing a player from the field, your market share increases because there’s now one fewer provider.

Gain a unique competitive advantage

Finally, acquisition lets you gain a competitive advantage. This can happen in any number of ways, such as:

  • Buying the most efficient company in your industry.
  • Acquiring a startup’s intellectual property.
  • Owning a much-loved industry product.

Of course, your competitive advantage could come from removing a competitor from the field. Either way, acquisition can provide a much-needed cutting edge to compete with the larger fish in your niche.

How to plan for growth in business acquisitions

Approximately 70-90% of business acquisitions fail because of one reason or another, but how do you plan for your acquisition to trigger growth?

It starts not after the acquisition but before it through leadership, strategic planning and having a transparent workflow to turn an existing acquisition into a success story.

These steps include:

  • Defining key growth objectives.
  • Conducting objective, targeted market research.
  • Investing in substantial due diligence.
  • Financial modelling to plan a route to profitability.
  • Securing the appropriate financing.
  • Ensuring cultural fit.
  • Building a robust integration team.
  • Developing a communication strategy.
  • Retaining key talent from the acquired company.

Without considering these steps, making an acquisition successful becomes a shot-in-the-dark exercise.

Cons of business acquisitions

Not every business acquisition is successful.

Sometimes, growth through acquisition isn’t the way forward. One cautionary tale is the unsuccessful acquisition of the much-loved department store chain British Home Stores (BHS) in 2015.

Retail Acquisitions Ltd. purchased BHS from Sir Philip Green for a nominal value of £1. The acquisition was an unmitigated disaster, with the company struggling with high debt, low sales and a massive pension deficit. Within one year, BHS would close all its stores and shed thousands of jobs.

It demonstrates that real cons to the acquisition growth route must be factored into any decision.

Integration challenges

By far, the biggest obstacle any business has to overcome is integrating the two organisations. If they have separate cultures, systems and processes, getting everybody on the same page can be a headache.

It could result in reduced productivity, low employee morale and poor overall performance in the medium to long term.

Financial risks

Acquisitions always involve financial considerations, including the initial purchase cost, existing debt burden and necessary alterations to the overall financial structure of the company.

Paying too much for a company or failing to finance an acquisition with appropriate terms properly can adversely impact your organisation’s financial health.

Execution troubles

All acquisitions are relatively complex. They each require careful planning and suitable execution to make the most of them.

Improper due diligence, underestimating the scale of integration or not accounting for other obstacles can hamstring the success of your acquisition.

Cultural challenges

Merging different cultures can generate employee resistance, lower employee morale and create tension between your new employees.

Navigating the cultural challenge means building a communication platform that holds employee engagement and retaining key talent.

Reputational hits

Sometimes, acquisitions may not be welcomed by your existing customers. Unfortunately, acquisitions of troubled companies often require negative actions to extract maximum value, including:

  • Reductions in staff
  • Pay cuts
  • Product/service changes

These issues can result in customers and other relevant stakeholders pushing back against your company. This could lead to lowered customer trust and a tarnished brand image.

How to minimise risk in business acquisitions

Not every obstacle can be foreseen. If you’re a construction company with a booming business that has recently acquired a smaller company, you could be in the middle of a transition when the UK enters a recession.

With construction being excessively vulnerable to economic downturns, such obstacles could derail your acquisition growth strategy.

So, how do you minimise risk? The answer is planning and assembling the right team to oversee the acquisition.

Generally, you should focus on three key areas, which are:

Operational – Integration planning and how a target company will enable you to expand your capabilities and perform to a higher standard.

Financial – Financing the deal and creating realistic financial projections to assess the value of a potential acquisition.

Legal – Ensuring compliance throughout each stage of the process to prevent an acquisition from falling through at the eleventh hour.

Without concentrating on these three areas, you could find yourself overpaying for a company or not having an integration plan that allows the amalgamation to progress at the expected rate.

This is where hiring an outsider can be helpful. Third-party professionals provide an objective overview of the situation and can make suggestions with your best interests at heart.

At Hilton Smythe, our experienced team of business acquisition and growth professionals can offer objective advice and support for navigating the tricky waters that come with a new acquisition.

If you want to succeed in your acquisition plan, contact Hilton Smythe to speak to the team now.

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