Why you should consider an acquisition strategy

There are many articles and guides on how to buy a business but there is not so much written about why you might want to do so in the first place.

So that is what we shall try to explore here.  Buying a business as an individual is a slightly different topic, what we will focus on in this article is an established business making a strategic acquisition.

An acquisition is an investment: you are choosing to deploy some of your resources to acquire control of another business with the aim of generating value and a return from this investment.

There is quite a lot to unpack, even in that relatively straightforward statement:

• It is a choice – what strategic reasons might there be for doing this deal? What alternatives are there?
• You are deploying resources – what resources do you have and what is the opportunity cost of using them in this way?
• Acquiring control is one thing, but what will you do with the business once acquired?
• What is an appropriate return from the investment relative to your cost of funds and the risk factors in the business?
• How does the acquisition enhance shareholder value?

In doing all of this, you are accepting that you are taking on a business risk, because the returns are uncertain.

The first and most obvious reason to make an acquisition might be growth.  Growing organically through your own efforts can take a long time and incremental change might not be fast enough.  Growing through acquisition can give you an instant step-change increase.

Just being bigger is not an end in itself though, you need a reason why growing benefits your company and increases shareholder value.  The reason could be one or more of:

• More turnover within the same infrastructure and fixed cost base should give you more profit, “economies of scale”
• Greater market share gives you more market power in setting your prices, or scale to get into bigger contracts that you may previously have been perceived as too small to take on
• Greater volume gives you more buying power with suppliers
• Size has a gravitational pull – more customers might come to you because the bigger business feels like the safer choice
• A larger organisation has a potentially greater range of career opportunities for your people and the gravitational pull effect can work for recruitment too
• Growth is perceived as success (rightly or wrongly, and whether this perception matters to you or not)
• Larger businesses tend to be more valuable in the market than smaller ones, due to the benefits of scale and because certain types of buyers only become interested once you reach a certain size

An acquisition might not be about doing more of the same; getting into something a little bit different but complementary can be beneficial too.

A new customer base (either geographically or customer type) can open up cross-selling opportunities for the respective products or services of the combined businesses, and enable both to achieve more than they could in isolation.

There might be benefits from buying a supplier to control your sourcing of a key input; of buying a business downstream to get direct access to end customers and lost margin; or of bringing an outsourced service (and their margin) within your control.

Sometimes, acquisition might be your only way to gain access to something valuable.  Another company might have a product or technology, a brand, key customers, or a team of experienced skilled people that you can’t replicate; at least not in the short- to medium-term.  Acquisition therefore gives you a shortcut to something that could take a long time to create in your own business.

It could also skip some of the risk of failure inherent in undertaking projects, for example in product development, a brand-building campaign or recruiting a sales team to try for organic growth.  These investments may or may not be successful, whereas an established business that has already done it no longer bears those risks.  It’s a bit like the difference between buying an existing house and buying a self-build plot and taking on the development.

Acquisition of course brings different risks into play, which you may view as more or less concerning, but that is where experienced advisers come in.

Occasionally, a business might be acquired for partially altruistic reasons, to keep it going and people in work where an owner can no longer continue.  Although most of what we’ve talked about above is about making more profit, these sorts of deals really do happen.

The reality is that very few independently owned businesses make acquisitions, which seems odd as all independent business will eventually need to sell.  For those that can see the benefits of growth through strategically acquiring other businesses in their market, there are plentiful opportunities out there.  Exploring these opportunities could be a game-changer for your company.

If you would like to discuss this further please contact Mark Neath (Corporate Finance Partner) or alternatively click here…