Can acquisitions be used as a growth strategy?

29 November 2022

Services:

Acquisitions and Disposals,

Expansion & Improvement,

Funding and Asset Finance

Expanding businesses through mergers and acquisitions have become ever more popular in recent years as a growth strategy for many SME businesses. Making strategic business acquisitions can be a beneficial way to achieve growth quickly.

There can be many reasons why companies use acquisitions as a growth strategy including financial growth, economies of scale, filling gaps of products or services, entering new markets, acquiring talent and intellectual property, reduce competition or create more value.

In this blog, I'll look at the reasons for using acquisitions as part of your growth strategy and how having a strategic acquisition strategy, can help make your business acquisitions a success.

 

Growing your business through acquisition

If you are serious about growing your business, then making mergers and acquisitions (M&A) a central part of your growth strategy alongside organic growth can be a way to achieve your growth targets.

Many SME's reach a plateau where their growth may be limited by external factors such as the sector they operate in, economic factors (such as recession), the size of the market and competition in the market. Growth can also be limited by internal factors, such as the ability to recruit and retain talent, skills shortages, limited time, limitations of the current management team or limitations of assets, such as production facilities etc.

There are many sectors that continue to grow rapidly such as technology, food production & delivery, engineering and some areas of construction. For businesses operating in these sectors, acquiring other companies can allow you to take advantage of rapid market growth and increase market share with speed.

 

How can acquisitions help business growth?

There are many ways that business acquisitions can aid business growth and the benefits of using mergers and acquisitions as a growth strategy include:

 

Diversify products and services

If you have a gap in your product or service offerings or are looking to spread risk through diversification, then acquiring a company that offers these products or services currently can be quicker and easier than developing those products or services from scratch.

 

Increase market share

Acquisition is often by far the quickest way to gain and increase market share compared to slower organic growth. This strategy for acquisitions to increase market share has been seen a huge amount in sectors such as banking, accountancy and technology.

 

Access to new markets

It can be difficult to break into new markets without significant upfront investment. A strategic acquisition strategy to buy companies in new markets can save companies a significant amount of time, effort and money. This can be especially true when trying to break into international markets as it's often easier to purchase a local established business in the country you wish to trade, then start from scratch.

 

Access to funds and assets

It may be that by buying another company will allow you to access things like better production or distribution facilities. It is often less expensive and quicker to buy rather than build.

As a larger combined company or group, your acquisition could give you increased access to capital that wasn't available pre-acquisition.

 

Acquire skills and technology

Acquiring a company can allow you to acquire skills (for example people skills or research & development capabilities) or acquire innovative technology quickly and at a lower cost than if this was being developed in house.

In today's tough recruitment market, many companies now look to buy other companies to acquire talent in a firm and the skills they bring to the table.

 

Spread risk

M&A can allow companies to spread risk across a variety of revenue streams by diversifying products or services.

Having multiple revenue streams can ensure continued operations if one revenue stream fails or reduces and can help with company sustainability in the longer term.

 

Reduce & rationalise overheads

Often when acquiring another company, the main benefit can be the ability to significantly reduce overhead costs/operating costs, gain economies of scale and to improve margins and cash flow.

You may well be able to reduce costs because of higher volumes or achieve better bargaining power with suppliers or distributors. Achieving cost synergies can be a way to make both the acquiring company and the acquiree more profitable.

If this is your reason for acquisition, then it's best to target companies with lower margins and lower returns as it's easier to improve the performance of these types of companies.

 

Gain competitive advantage

By buying a competitor, a company can quickly gain competitive advantage. Often mergers and acquisitions result in greater financial strength for both companies. Having greater financial strength can lead to higher market share, reduce competitive threat and gain additional influence over customers.

 

Driving growth through a clear acquisition strategy

The consolidation of two or more companies is often a much faster way of achieving growth, rather than relying on pure organic growth. However, this growth doesn't happen by itself or continue just because the deal is done.

A good M&A strategy, solid due diligence and a post acquisition integration plan will ensure greater success of any acquisition you make.

Your strategy should include clear business reasons for seeking the acquisition. Any acquisition strategy should also tie into your overall business plan and long-term goals, and you need to be clear on how any acquisition will underpin these.

 Your M&A plan should include elements such as the core objectives of acquisitions, the types and sizes of business you want to buy, the synergies you are looking to capture and the number of acquisitions you want to make. Think about your biggest channels of growth and opportunity, as well as any gaps that an acquisition could fill.

 

Why is due diligence important?

Due diligence is a vital step that you should undertake if you are looking to buy another business or invest in another business.

Due diligence is important as it is a detailed investigation of a target company and provides verification, reassurance of the company you are considering purchasing or investing in.

It will help you to gather all the relevant facts about key areas of the target business.

Due diligence plays a crucial role in any business acquisition process and can be the difference between a successful acquisition and a bad acquisition.

 

Create a business acquisition team

To ensure that acquisitions do drive growth, you need to ensure you have the capacity to manage the acquisitions both through the buying process and beyond when the acquisition is completed.

Buying a business can mean you take your focus off your core business, and this can be to the detriment of your day-to-day operations. The deal process can take time and you want to ensure that your team have the time to dedicate to the acquisition process as well as managing daily business operations.

Ensuring you have the internal resources to manage both the acquisition process and post-acquisition integration is key.

 

How to finance a business acquisition

Acquisitions are mostly funded from a combination of debt and equity. If the company doesn’t have its own funds available for an acquisition, it can look to secure external funding.

There are many ways to finance an acquisition including:

  • Cash

  • Earnout/deferred consideration

  • Shares

  • External debt finance

  • External equity finance

  • Vendor equity

  • Vendor loan

 

Post acquisition growth and creating value beyond a deal

Growth and creating future value is the ultimate goal of any acquisition. Acquiring another business can be a way of boosting top-line growth and shareholder return. The reality, however, can often be different to what was expected.

Maximising growth after a deal is done and longer-term value creation is often challenging, with deals often resulting in financial numbers and synergies not being maximised.

To ensure you maximise the benefits of any acquisition, create continued growth and improve future performance, you need have a clear post deal plan. This needs to maximise anticipated synergies and include a plan for successful integration after the deal is done.

Ensuring successful integration after the deal will help you to hit your growth strategy targets and get the full benefit that an acquisition can bring to both companies.

 

Conclusion

When carefully planned and executed, buying one or several other businesses can create a great business model for growth. However, mergers & acquisitions have their challenges.

Having a clear business plan around growth that focuses on growth opportunities, including both organic growth and growth via acquisition is important. Having a team or person that is responsible for the acquisition and using professional advisors like Haines Watts to advise you on your M&A strategy and helping you to execute it, can be the difference between success and failure. For help and advice, you can contact us at our offices in Liverpool, Wirral and Chester.

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