In theory, buying another business can be a good way to grow, but it needs careful study.
Many smaller firms see acquisitions as a way to fast track growth but few have the experience to undertake this activity with a high probability of success.
Even in large corporations where the resources are available to man this activity properly, only a minority have a record of successfully improving shareholder returns through acquisitions.
Those corporations that have done so have gone about this activity in a systematic manner with a focus on longer term strategy rather than opportunistic buying, an objective and systematic investment screening process and a proven integration program.
Few SMEs have the capability or resources to undertake acquisitions at this level of intensity. A smart SME can however gain the benefits of an acquisition while avoiding the major pitfalls.
Many SMEs have growth opportunities which they cannot satisfy through organic growth. There is a limit to just how fast a business can recruit and integrate new employees, increase infrastructure, logistics and production capacity and find the cash to fuel the expansion.
Many of these businesses are considering acquisitions for the first time but are not sure how they can do it effectively or how they will cater for the strains such an activity will put on management time.
If you are a smaller business you simply don’t have the critical mass to take on an acquisition and get it wrong. An acquisition that fails to deliver the results can suck away precious executive time and undermine your core business.
To improve the chances of success, you need to be very selective in which firms you buy. You need to target firms which have high strategic value, where the integration task is non-complex and which require little of your key management time.
SMEs undertaking a limited number of acquisitions over an extended period should avoid acquisitions that only deliver cost savings. Very few of these ever contribute sufficient savings to overcome additional costs in the acquisition if the acquired business is disrupted during the acquisition process or where the acquisition takes longer and consumes more resources than anticipated.
Acquisitions which only contribute their own revenue rather then strategic value to the consolidated business are highly sensitive to minor disruptions. Anticipated benefits in the acquisition can be rapidly eroded with the loss of key employees, key customers or delays and additional costs in integration.
Acquisitions which deliver substantial revenue opportunities or that provide resources to satisfy pent up demand have a higher chance of success.
The business that can rapidly push new products through an existing channel or that can readily cross sell across an acquired customer base has greater margins in which to absorb problems.
The acquirer who can immediately use spare capacity in acquired production facilities or warehouses can quickly start to generate new profits.
Most first time acquirers fail to develop a worst case scenario which allows them to test out the impact of possible acquisition integration problems on their core business.
Such an analysis will uncover risks that need to be managed, key employees who need to be targeted for retention and additional resources that need to be available if problems occur. The SME has to build resilience into their own business and into the integration process in order to minimise disruption if they run into problems.
If you are going to buy a business to extend your current business then you should also avoid buying a firm that needs a lot of effort to clean up before you can properly exploit the acquisition.
Many acquirers make the mistake of buying cheap when the opportunity presents itself without really considering the implications of the acquisition on their core business and then regretting their impulsive action later.
Smart SME acquirers buy businesses that are well run, have good succession plans for departing owners and have established performance setting and monitoring systems to keep the acquired business operating effectively throughout the integration process.
The last thing an SME needs is to have their best people distracted with a clean up operation in an acquisition while their effort should be focused on satisfying outstanding demand.
If you have not been down this path before, consider bringing someone into your business who has had experience in undertaking an acquisition integration exercise. Also make sure you have professional accounting and legal advisors with experience in M&A activity.
Providing you chose your target carefully, the additional cost of planning and preparation will be well rewarded with a profitable result.
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