Opportunities and Risks of Growing Your Business by Acquisition
Five grey doors with one red door in the middle of the others.
One common strategy for companies that want to expand is growth by acquisition. This can be as simple as buying businesses in your industry to expand geographically like VivoPools did. The company used a business acquisition strategy to expand into four states and become a leading provider of pool maintenance services in those markets.
Other acquisitions may include acquiring a competitor, expanding a brand globally, or expanding a company’s product line. Sara Lee, for example, sold its products in more than 180 countries worldwide and acquired many different brands, including Coach Leatherware Company, Playtex Apparel, and Champion Products Inc.
No matter what type of company a business chooses to acquire, there are advantages and disadvantages to this type of growth strategy.
Opportunities in Growing Your Business by Acquisition
· Adding Products and Services
Acquisition provides businesses with an excellent opportunity to expand their current products and services, especially within their own industry. When you already know an industry inside and out, you can “add on” a business without needing to invest a lot of time in learning a new process. You can also make improvements based on your own operations.
Another great way to grow is by adding complementary products. For example, when Proctor and Gamble acquired Natura Pet Products, they were able to expand into the holistic and natural segment of their current market. This opened them up to new worldwide marketing and sales opportunities.
Jaime Brown, COO of Cellairis, says that acquisition within their own industry was one their key growth strategies. “Acquisition can be a powerful growth model since it allows us to focus on businesses that already have knowledge of a segment of our industry, can provide an expansion of our products or services, and are based in desirable locations,” Brown says. “The obvious trick is always the process of converting the prior owner to our systems and model to ensure we provide customers with a similar experience regardless of the store or location."
· Economies of Scale
Acquisitions of companies in your own field will strengthen your buying power and spread your fixed costs over a high level of sales. This achievement of economies of scale can increase your acquisition profitability. Waste Management is a good example of successful growth through acquisitions. This multi-billion dollar enterprise was built by acquiring hundreds of companies in the waste business.
· Profit centers are already in place
Acquiring businesses is inherently less risky than starting from scratch. Everything is already in place: the sales, earnings, and organization. All these are uncertainties when starting a new business or operation.
· Expand geographically
Geographic expansion increases your customer base and, therefore, your sales. It also opens up the opportunity for advertising campaigns that would be inefficient in a limited area.
· Vertical Integration
Acquiring a competitor or another business may allow you to vertically integrate, which can lower your costs and ensures higher quality standards. This may include acquiring a supplier, a distributor or a combination of both.
Risks of Growing Your Business by Acquisition
· Branding Mistakes
Most acquiring firms take great pride in their own brand names and generally will change an acquired name to their own. This can sometimes be a mistake, however, like when Macy’s acquired Marshall Field’s store in Chicago. Four years later, 81% of Chicago shoppers still preferred the Field's name over Macy's. Brand reputations take years to build, and it may be in your company’s best interests to keep your acquisition’s brand name intact.
Willan Johnson, CEO of VivoPools, says that about 50% of the time, they will change the name of a new acquisition to Vivo right away. If the pool company being acquired has a strong presence in the market, however, they may wait as long as a year to change the name. This is a function of every market being different, a factor you must handle carefully to ensure success, Johnson says.
· Failure to Integrate
With every business acquisition strategy, there will always be challenges with integration, such as labor issues that need to be resolved, spending habits, management style and workplace culture.
Carl Shepherd, Co-Founder of HomeAway, recommends making integration a priority from day one. “Clearly define how you’ll integrate the business into your existing company, and do not underestimate the need for a cultural fit,” he says. “Combining companies with different business models or whose workers have substantially different values might make integration and operations too complex.”
· Failure to Clear Seller's Potential Liabilities
Any company you acquire will have some problems and possibly unrecorded liabilities. If the seller discloses any unrecorded liabilities or problems, slow down and be careful to take the time to have them fully resolved.
- Inadequate Evaluation of Retaining the Management
In some businesses that are relationship-driven, retaining managers and their client networks is crucial to the success of the business. In other cases, you may be able to bring in your own managers with no loss to the business. Changing the management team may even be part of your business acquisition strategy.
In one study by McKinsey & Company, more than 65% of respondents said that managerial talent is the single most important element in creating value, and nearly 85% of respondents kept pre-acquisition managers in their positions. When acquiring a company, be sure to include evaluating the management team in your due diligence process.
- Poor Planning
Before closing, develop a long-term strategy to ensure the value of your business acquisition. Carl Shepherd, Co-Founder of HomeAway, said of one of his acquisitions: “The acquisition failed, not because we didn’t know what we were buying, and not because we were unsuccessful in integrating the culture (they were smart, great people), but because we had not laid out a longer-term strategy for diversifying their revenue stream that we could tap into stemming from a macroeconomic challenge.”
The biggest risk in expanding or making acquisitions is incurring too much debt, either from the seller or other sources of financing. Whenever you hear about companies going into bankruptcy, you will probably find that the company had launched a capital project or acquisition by borrowing money and were unable to pay it back.
As you grow your business, either don’t borrow any money at all or restrict borrowing within conservative limits.
· Inadequate Accounting Controls
Review the current accounting process, have the financial statements audited and include your CPA in the process.
Anthony Mongeluzo, the president of Pro Computer Service, learned this lesson the hard way. “The acquisition turned out to be a complete disaster,” Mongeluzo says. “He had lied about his revenue numbers. He had forged his QuickBooks reports. Thankfully we were in and out in a three week period. But we had to part ways.”
“These days we’re a lot more formal,” Mongeluzo added. “We ask for bank statements. We have our CPA set everything up.”