Why Acquisitions Are a Smart Strategy for Business Growth
The following contribution comes from the BDC website, which describes itself as follows:
We are BDC, the Business Development Bank of Canada, the financial institution dedicated to Canadian entrepreneurs.
We help create and grow strong Canadian businesses through financing, advice, and equity, with a focus on small and medium-sized enterprises.
We support entrepreneurs in all sectors and at all stages of development from our business centers across Canada and online at bdc.ca.
We are committed to the long-term success of Canadian entrepreneurs and understand that a business is much more than money.
Authorship by the team.
How to Evaluate a Potential Business Acquisition
Who to Consult When Buying a Company?
If you want your business to grow quickly, an acquisition strategy might be the right one. While buying another company requires more capital than letting sales grow organically, this approach often delivers faster results without necessarily being riskier.
Do you think an acquisition strategy might be right for you?
Read on. The following article presents the different types of acquisition strategies, explains how they differ from organic growth, and outlines the best way to begin an acquisition process.
An acquisition may seem risky, but this is where most entrepreneurs go wrong. Buying an established company is a sound decision precisely because it is already well-established.
Devesh Dwivedi
Principal Consultant, BDC Advisory Services
What is an acquisition strategy?
An acquisition strategy is a comprehensive plan for a company to grow by acquiring one or more companies. It can take many forms, but there are three main types.
Horizontal Acquisition
This type of acquisition involves buying a competitor: a company that operates in the same industry and at the same stage of the supply chain. “Essentially, a horizontal acquisition means buying a company that does the same thing as you,” explains Devesh Dwivedi, Principal Consultant at BDC Advisory Services. “For example, if you own a grocery store, it means buying another grocery store. If you run a plumbing business, it means buying another plumbing business.”
Vertical Acquisition
This type of acquisition involves buying a supplier or a customer: a company that operates in the same industry but at a different stage of the supply chain. For example, a grain farmer might buy a small local mill to produce flour or a local grain elevator with a rail line to expand its shipping capacity.
Conglomerate Acquisition
This type of acquisition involves buying a company in a different market or industry: a company whose activities are completely different. For example, a musical instrument company might acquire a motorsports company, or an automaker might buy a chemical company. Conglomerates are usually large entities, and SMEs rarely make these types of acquisitions.
What is the difference between an acquisition strategy and organic growth?
Companies can grow in two main ways:
Acquisitions: buying other companies.
Organic growth: achieved naturally through internal company efforts.
According to Dwivedi, «organic growth involves increasing sales through word of mouth, advertising, and hard work. It doesn’t require a large initial investment, but it does require time.»
Acquisitions can help businesses grow faster, but they require more initial capital, which is why some entrepreneurs consider this path riskier. However, Dwivedi explains that both strategies carry similar risks.
“At first glance, an acquisition might seem risky, but that’s where entrepreneurs go wrong,” he says. “Buying an established business is a sound decision precisely because it’s already well-established.”
Consider that 80% of startups fail within the first five years, most of which follow an organic growth strategy. Meanwhile, more established companies have already determined their product-market fit, have reliable suppliers, and loyal customers. They have proven to be among the top 20% of successful businesses.
Growth and Risks
“For this reason, growing through acquisitions doesn’t necessarily have to be riskier than growing organically,” says Dwivedi. “The risks are, in fact, quite similar.”
Advantages and Disadvantages of a Growth Strategy Through Acquisitions
Buying another company can bring many advantages to your business. Here are the main advantages and disadvantages to consider before looking for a target company.
Talent Acquisition
Buying a company is an excellent way to acquire skilled employees, especially when the job market is saturated and talent is scarce.
“Acquiring a company for its staff is a strategy I call ‘acqui-hire,’” explains Dwivedi. “It can be a quick and effective way to acquire the skills you need without having to go through the hiring process, which includes contacting candidates, conducting interviews, checking references, and providing training.”
Customer Growth
An acquisition will help your company rapidly expand its customer base. For example, if you own a supermarket and buy a similar one in another city, you will significantly increase your revenue, number of customers, and market share. In addition to growing in size, you could also gain access to new customer segments, regions, or purchasing patterns that complement your existing business.
Technology Acquisition
Buying a company can be a smart way to acquire new technology or skills. “Imagine you’re a technology company focused on R&D. You’ve just developed a new device, but you need to produce it before you can sell it. In this case, buying a manufacturing company with the right capabilities could be a good option,” explains Dwivedi.
Or imagine you work in the logistics sector and want to optimize delivery routes to save fuel. You could develop an app from scratch, but that would take time and involve risks. Instead, it might be more convenient to acquire a small technology startup specializing in route optimization tools.
Efficiency Through Synergies
In many sectors, a significant portion of expenses consists of fixed costs—costs that remain constant regardless of sales volume. By joining forces, two companies can operate more cost-effectively than if they operated separately. “For example, if you own one supermarket and buy two more, you don’t need to hire two additional accountants, CEOs, or marketing directors,” explains Dwivedi. «That’s synergy: when the resulting entity operates at a lower total cost than the two companies separately. This approach has great potential, which is why so many companies opt for acquisitions.»
Cultural Challenges and Potential Conflicts
The main challenge of growth through acquisitions often lies in the cultural differences between the merging companies. Successful mergers generally require shared values, processes, corporate culture, habits, and ways of working.
Consider the following:
Are both companies open to innovation?
Do they make decisions similarly?
Is one company highly hierarchical, while the other is horizontal and collaborative?
“Without this alignment, even a financially sound acquisition can generate friction, low morale, and the loss of key talent,” emphasizes Dwivedi.
If it’s the right deal, it’s never a bad time. Likewise, if it’s the wrong deal, it’s never the right time.
Devesh Dwivedi
Principal Consultant, BDC Advisory Services
When is it appropriate to consider an acquisition strategy?
The ideal time to launch an acquisition depends on many factors. However, according to Dwivedi, most of these factors are internal: they relate to the company itself and rarely to the general macroeconomic environment.
«I don’t believe in trying to predict the right market timing, because if you have the right opportunity, it’s never a bad time,» he says. «Conversely, if you have the wrong opportunity, it’s never a bad time.»
It can be easier to complete an acquisition under certain economic conditions, such as:
– when interest rates are low
– when inflation is stable
– when many business owners are retiring
«The opportunity has to be so good that it survives even difficult times,» Dwivedi summarizes.
«If you focus too much on the economic context, you risk making an acquisition that only works in the short term.»
How to start an acquisition process?
To successfully acquire a company, it’s essential to follow an acquisition roadmap. This will help you prepare, execute, and integrate the acquisition. Here are the three key steps to get started.
Initial Preparation
The initial preparation stage involves defining your vision: What are your objectives, and how does the acquisition fit into your overall strategic plan? Do you want to acquire technology, expand your customer base, or expand into a new region? At this stage, you’ll assemble your acquisition team with internal and external experts.
Target Identification
Once initial preparation is complete, it’s time to research potential acquisition candidates. Develop a shortlist based on strategic compatibility, culture, and financials. Draft a letter of intent. This is a formal, written, and non-binding document that outlines a preliminary agreement for your company to acquire the seller’s business. It will typically establish key terms, timelines, and exclusivity.
Conducting Due Diligence and Closing the Deal
Proceed to conduct due diligence on your target, thoroughly analyzing its finances, legal aspects, human resources, operations, and culture. This is the stage where many transactions succeed or fail. Negotiate the purchase agreement and proceed with the integration, following a detailed post-merger integration checklist.
Next step: Find out what it takes to make a successful acquisition by downloading BDC’s free guide on buying a business in Canada.
The Definitive Guide to Business Acquisitions for Strategic Growth
The following contribution comes from the Abrams Valuation Group website, which describes itself as follows: Abrams Valuation Group, Inc. is a team of leading valuation experts with advanced quantitative capabilities that most practitioners simply cannot match. Our deep understanding of valuation theory allows us to deliver optimal solutions, adapting existing valuation models or creating entirely new valuation frameworks to meet our clients’ needs. Our unique valuation approach combines quantitative science with the art of valuation strategy to produce the most accurate results for our clients.
Authorship by the team.
Acquiring a company can be an excellent growth strategy to accelerate its development and increase its value, market share, and reach. For the past 30 years, Abrams Valuation Group, Inc. has been a key advisor on numerous successful acquisitions. In this guide, we will delve into the intricacies of acquiring companies, as well as some of the main pitfalls to avoid.
Understanding Business Acquisitions
An acquisition occurs when one company acquires another, typically as part of a broader growth strategy. Like any investment, acquisitions carry risks, and choosing the wrong target company, financing option, transaction structure, or legal entity can have a serious negative impact on your business. However, with proper market and target company research and due diligence, acquiring another company can be an excellent investment to increase your company’s value and growth.
AVGI Independent Business Acquisition Appraiser
Benefits of Strategic Growth Through Acquisitions
Acquisitions offer a number of unique advantages as a business growth strategy. Acquisitions can provide access to new markets, customers, and technologies. Acquiring an established company with a presence in a new market, for example, can be a shortcut to accelerating growth.
An acquisition can also increase efficiency, reduce operating costs, and improve competitiveness. For example, if a company invests a large amount of money in sourcing parts for its products, it may be more cost-effective to acquire the supplier and produce those parts in-house.
Pre-Acquisition Planning
There are several key steps to laying the groundwork for a successful acquisition. Let’s examine the ideal pre-acquisition process.
- Establish the Acquisition Reason
Clearly defining the primary reason for the acquisition before beginning the process helps avoid confusion and drives a successful acquisition. This reason—whether it’s to expand market share, acquire new technology, or something else—will be central throughout the acquisition and will influence negotiations and key decisions. Ensure that all internal members of the company involved in the acquisition understand the reason to facilitate a unified approach.
- Establish Search Criteria for the Target Company. Once the acquisition reason has been established, you need to define the qualities of the ideal company you are seeking to acquire. This target company profile should include:
Amount you are willing to invest
Target company’s financial situation
Industry and market sector
Company maturity level (startup or established company)
Staff size
Tangible assets (real estate, machinery, truck fleet)
Intangible assets (intellectual property, patents, licenses)
Deciding what you are ideally looking for in each of these categories can accelerate the search for the ideal target company, improve the selection process, and expedite the acquisition.
Ideal Company Profile for Business Acquisitions (AVGI)
- Research and Contact Strategies
Now comes the research stage. Finding the right group of potential target companies can be one of the most laborious parts of the process. However, if approached methodically, it can be more efficient. Mergers and acquisitions databases can be helpful in finding companies for sale, and you can often filter the results by industry, price, and other criteria. Market research can help you determine a reasonable price for acquiring companies in your ideal industry range.
Typically, the contact for a company listed in a mergers and acquisitions database will be a banker or intermediary acting as a liaison with the company. If the company seems relevant enough to include in the initial database, contact the initial contact to discuss the starting price and determine if the company’s details are relevant for consideration as an acquisition target.
- Selecting the Target Company
Now you face the important task of narrowing down your target company options to the best one. Comparing market prices and obtaining acquisition valuations can be extremely helpful in making the final decision. Therefore, it may be more useful to narrow down the options to two or three possibilities to investigate them further before determining the final target company for acquisition.
Acquisition Valuation and Financing
Once the pre-acquisition groundwork has been laid, the next step is to determine the acquisition price and finance the transaction.
Calculating the Target Company’s Value
Obtaining an independent business valuation of the target company is essential to determining its true value before agreeing to the sale. This lays the foundation for a reasonable, targeted, and agile negotiation process and facilitates realistic expectations for both parties.
There are several ways to value a company, such as the price-to-earnings (P/E) ratio, the enterprise value-to-sales (EV/Sales)
