Growing your business can happen in any number of ways. With 5.5 million UK small businesses, this is often the most efficient way of taking your brand to the next level.
Should you grow your business through acquisition? Like all growth strategies, there are pros and cons to pursuing the acquisition route. Let’s explore whether a business acquisition is an optimal growth strategy and the potential benefits.
Is business acquisition a good growth strategy?
Business acquisition remains one of the most popular growth strategies. It’s also the most popular exit strategy for entrepreneurs, with 58% of companies that exit the market doing so due to being acquired.
Business acquisitions have several advantages as a growth strategy because choosing to buy another company can allow you to access the following:
- Established customer bases.
- Existing supply chains.
- New talent.
- New technology.
- Intellectual property.
Acquisitions also allow you to enter new markets and eliminate existing competition. For larger companies, it’s often a strategy to acquire any new startups that enter their spaces before they pose a threat.
For example, this is why Facebook acquired Instagram for a record $1 billion in 2012. Meta (Facebook’s parent company) absorbed a red-hot social media pretender while providing access to a younger customer base, which Facebook has been losing over the years.
Business acquisitions can also hamper business growth, however. Selecting the wrong target or uncovering risks during the post-transaction integration phase can curtail your growth plans.
How do you grow a business through acquisition?
Growth through acquisition can happen in any number of ways. It all depends on the long-term vision of the purchasing company.
Several types of acquisition exist, but they can be placed into the categories of financial vs strategic acquisitions.
Financial acquisitions are initiated exclusively for the financial gain involved in buying a company. On the other hand, strategic acquisitions are designed with the long-term in mind.
For example, your company may perform a strategic acquisition when it’s worried about a startup boasting a new technology that could erode its market share or even challenge its supremacy if left unattended.
Let’s examine a few ways that a business may decide to grow via acquisition:
Company A – Company A wants to reduce its reliance on its partners within the supply chain. Company A decides to launch a vertical acquisition to deal with this issue, whereby it takes control of the distribution or supply network.
Company B – Company B is an established, successful English company, but it also wants to expand within the UK. To do this, it performs a horizontal acquisition where Company B buys its Scottish and Welsh competitors to take control of these markets.
Company C – Company C is worried about the fluctuations within its market. With substantial cash reserves, it decides on a conglomerate acquisition. This type of acquisition involves acquiring a company within an unrelated industry to spread Company C’s overall risk essentially.
As you can see, there are many ways for a company to grow itself. It all depends on the direction it wants to go in and the risks posed to that specific company.
Do acquisitions impact business growth?
Acquisitions have a dramatic impact on business growth. Overnight, your company will have more assets on its balance sheet, customers and opportunities to expand in the months and years ahead.
So, what are the ways acquisitions impact business growth?
Upgrade the balance sheet
The most obvious change will be found on the balance sheet. Once an acquisition goes through, the purchased company’s assets become your assets.
You may have a state-of-the-art facility on the books, an office block, company vehicles, inventory, or raw materials from one day to the next. This adds value to your balance sheet, making you a more valuable company to investors.
Greater market presence
Your acquisition may also result in a greater market presence. For example, if you complete a horizontal acquisition in another geographical market, you instantly have a footprint within a new part of the world.
It’s often viewed as the fastest way to achieve a broader market presence because you don’t need to go through brand-building from the ground up.
Overcoming the competition
One of the biggest advantages of performing an acquisition is to overcome the competition. Defeating your largest competitors can happen in any number of ways, such as:
- Eliminating a brand from the market entirely.
- Buying a smaller company to gain a competitive edge.
- Entering a closely related market to make life more difficult for a competitor.
For example, Vodafone and Three, the third and fourth largest UK mobile phone networks, have agreed on a merger to make the combined entity the most extensive mobile phone network in the UK.
What are the benefits of business growth through acquisition?
Business growth through acquisition is a sound strategy for achieving rapid growth. Whilst every entrepreneur wants organic growth, this is easier said than done. In 2022, just 27% of UK SMEs reported that they had achieved growth in the previous 12 months.
As you can see, it can take years to reach your long-term strategic goals organically, thus making acquisition an attractive alternative.
Rapid market expansion
Acquisitions are the most efficient way of growing your market presence. Instead of investing time and resources into growing your customer base naturally, you can acquire someone else and their customers.
This allows established businesses to immediately enter new markets, access new customer segments and even expand into new geographic locations.
Boost your market share
Fighting off competitors and taking over their market share is easier said than done., but with an acquisition, you can increase your market share.
Improving your market footprint this way can take the form of consolidation with existing players or removing competition from the market entirely.
You may buy a competitor directly or purchase a series of complementary businesses to undermine someone else’s market share.
Product/service diversification
Diversification is vital in every industry. Whilst there are far more blue water zones to move into by selecting a highly specific niche, creating a model based on this approach can leave you vulnerable to market fluctuations.
Acquisitions can help you diversify your selection of products and services to shield yourself from microeconomic volatility.
Grow your capabilities
Do your existing capabilities constrain you?
It could be a talented startup with new technology or a piece of intellectual property standing in your way. Likewise, it could be a company with a superior workforce that’s keeping them ahead of you.
By acquiring a company, you can access its technology, facilities, intellectual property and talent.
Unlock new customer segments
All successful companies have an ideal customer, but what if you want to change who your ideal customer is?
To go back to our Facebook example, Meta purchased Instagram for two reasons:
1. Instagram represents a broad social media threat.
2. Instagram was highly proficient at attracting a younger audience, which was an audience that Facebook was losing.
In this scenario, Facebook could access a customer segment that it had lost, but acquisitions can also be used to access customer segments it never had access to in the first place.
Another example of a UK company using an acquisition to access a new customer segment was Coca-Cola’s 2009 acquisition of Innocent Drinks, known for producing healthy fruit smoothies and juices.
The Coca-Cola Company acquired a majority stake in Innocent Drinks for £300 million. In this case, Innocent Drinks operated largely independently of the Coca-Cola Company under its own banner.
In exchange, the Coca-Cola Company accessed a growing health-conscious audience. It would later acquire total control of Innocent Drinks.
Improve shareholder value
Successful acquisitions can unlock new revenue growth opportunities whilst enhancing your market position, but this also has the side effect of growing your shareholder value.
Companies that grow to twice their size because of a single deal are far more attractive prospects for investors. Moreover, they reward your existing shareholders by growing their share value.
Anything that can improve shareholder value sets the stage for supercharging your growth by attracting brand-new investment.
Are there risks involved with business acquisitions for growth?
Substantial risks exist when purchasing another company. Any acquisition must achieve a specified goal outlined in a comprehensive strategy for identifying targets, performing due diligence and ensuring a smooth transition.
Before committing to any acquisition, you must know the associated risks.
Integration challenges
Integrating two separate organisations comes with its challenges. With different systems, processes and cultures, overseeing a smooth transition can be challenging.
Bungled transitions can lead to difficulties in integrating new operations and technologies. It can also lead to the departure of talented staff.
Underestimating the market risks
Significant acquisitions are no guarantee of success. Just because you purchase a company to increase your market share, enter a new market or diversify doesn’t mean everything will go off without a hitch.
One of the most recent examples is the CD&R acquisition of UK supermarket Morrisons for £6.3 billion. This was the largest private equity acquisition of a publicly listed company at the time.
Yet the acquisition was dogged by problems, including intensive competition within the UK supermarket niche, the COVID-19 impact and integration challenges.
Financial risks
Acquisitions nearly always involve making significant financial commitments. Some companies even have to take on additional debt to finance their purchases.
The financial risks go beyond the purchase price. Other associated costs must be factored into your calculations, including debt assumption, integration costs and underwhelming financial performances.
Cultural costs
Culture is vital when pursuing acquisition targets because differences can pose unique challenges.
At best, cultural misalignment can extend the transition phase, thus preventing the acquisition from reaching its full potential. At worst, it can lead to chronically poor worker relations and disruptive strike action.
Compliance headaches
All acquisitions are subject to UK competition law, and if you fail to account for this with the support of an experienced legal team, you risk getting bogged down in red tape.
Acquisitions may be subject to intense scrutiny, particularly within regulated industries. Failure to dot all the I’s and cross the T’s can lead to profitable acquisitions falling through. This risk is even higher when two substantial companies are involved in the transaction.
Overpaying
The final potential risk is overpaying on the deal. If an acquiring company overvalues a target and pays too much, there’s no recourse for reversing the deal.
Overpaying means diminished returns on your investment and unnecessary financial strain. Thankfully, this can be easily avoided by bringing in an objective business valuation professional who can inform you of the genuine value of a target company.
At Hilton Smythe, we have helped countless entrepreneurs through the process of acquiring a company to accelerate their business growth. With our team, you can negotiate each stage of the acquisition process to increase your chances of success.
To learn more about how we can help, contact Hilton Smythe today.
