A lot of the entrepreneurs that I work with are looking at acquiring businesses to fuel growth. While some acquisitions will result in increased growth, unfortunately the reality is that over half of the deals among small to mid-sized businesses fall short of the desired ROI and growth expectations.
Why? Because gaining every advantage that acquiring another business might bring to the bottom line requires upfront critical evaluation while adhering to a careful process which includes completing a strategic assessment and developing an acquisition plan. Casual approaches to acquisitions often result in unpleasant surprises and decreased value. Here are some useful preliminary steps to consider adopting should you choose to drive down the acquisition road.
Team up with a neutral party to kick-start the assessment process
Start with a strategic assessment. The strategic assessment phase of any acquisition is the most critical and least time-consuming piece; however it is also the one that most entrepreneurs overlook. To maintain objectivity, the assessment should be performed by a neutral team of professional advisers and your management team. Together, you should compile a strategic acquisition assessment that outlines both the strengths and risks of the acquisition. Evaluate the following:
How will acquiring the target company add or detract from your current value position and vision?
What are the goals and objectives of the company you’re looking to buy, the current business strategies, and the core competencies?
Do synergies exist between the two businesses?
Conduct a thorough SWOT analysis
It’s vital to explore the strengths and opportunities as well as the external weaknesses and threats that might affect the company’s growth. Then review external situation-markets, customers, supply chain and competitors, and assess what impact they might have on the acquisition and its success. The external assessment may reveal threats from existing competitors and potential new businesses, or it may uncover opportunities ready for the taking. Finish with a true assessment of the business culture, especially the ownership and management style. Ask yourself:
How do I handle change?
Am I willing to invest the time and capital to take my business to another level?
If so, is my management team capable of planning and implementing the changes in a way that will deliver desired results?
Throughout this analysis, an entrepreneur can benefit from the experience of independent professional advisers to help maintain your perspective and objectivity. During the assessment, as you develop an understanding of the gap between your vision for the business, the future state, and your current situation, consider other strategic growth options available and assess their financial implications. For instance, investigate whether the best option its to:
• Establish a strategic alliance or association with another business;
• Enter into a licensing agreement;
• Seek equity investment in your own company from a competitor;
• Purchase (partially or completely) another business that enhances and/or complements your company;
• Prepare an Acquisition Profile.
If it looks like acquiring another company is the best way to grow your business, be certain to test all your assumptions and biases. Avoid pursuing a company simply because you, or someone on your management team, always believed it would be a “good fit.” Prepare an acquisition target profile that identifies features of an ideal company that will add value and align with your strategic vision. This ideal company might enhance current lines of business, increase geographic locations and/or customer base, add to the talent pool, or enhance current technologies and processes. Be sure to factor in profitability, growth rate, projected rate of return, and affordability. The key question to explore might be – does this target company meet the strategic growth needs of your business plan? If the answer is yes, you're ready to move on to planning and due diligence, execution and completion.
Always remember: at their best, acquisitions can create dynamic synergies; at their worst, they can seep value from your existing business. The difference between the spectrum of these outcomes can be attributed to the quality of your initial strategic assessment.
