By Scott Bushkie
In today’s marketplace, if you’re not growing, you’re going backwards. According to a new Ernst & Young report, a whopping 69 percent of U.S. CEOs plan to grow through acquisition this year. Driving the trend are increased confidence in economic growth and the availability of capital.
The news these days often includes some announcement of a major corporate acquisition: Amazon acquired Whole Foods, CVS bought Aetna, and Arby’s got Buffalo Wild Wings. The utter scale of it all can leave many small and mid-size firms wondering if growth through acquisition is really within their reach.
For some businesses, the appeal of organic growth is that it feels familiar. As a business owner, you know what it takes to grow, specifically, an ongoing commitment to expanding your customer base, reinvesting in people, and managing your capacity.
But ignoring M&A as a growth option may ultimately be costly. Organic growth comes with many challenges and limitations, primary among them: organic growth many times can be slow vs the impact of an acquisition. Whether you’re launching a new product or expanding your territory, you can spend years, and hundreds of thousands of dollars or more, in marketing and development efforts.
Depending on your strategy, your organic growth plan may be just as expensive as an acquisition and as risky as a startup. Imagine the long-term resources you’ll invest in market research, searching for capable talent, networking, and sales.
There’s less risk if you have a dynamo team whose sole job it is to open new markets and make things happen. But for many businesses, each expansion is a significant risk that either hinges on the capabilities of an untried new hire or draws vast amount of time and attention away from your existing management team and their current responsibilities.
At the end of this time-consuming effort, you may have burned out your best people only to find that customer needs have changed or that a competitor beat you to the punch. Or, you may simply find that you’ve bitten off more than you can chew, damaging your ability to deliver on commitments (and your reputation) in the process.
The pros and cons of growth through acquisition
Unlike the slow pace of organic growth, expanding through strategic acquisition is typically faster and many times less risky. When you buy a business, you’re acquiring a proven operation with an experienced employee team, operational capacity, and a built-in base of customers. In a relatively short amount of time you’ll gain valuable expertise, new clients, and new sources of revenue.
As long as your cultures align, these mergers should benefit everyone. In fact, many times an acquisition creates a 1 + 1 = 3 scenario, multiplying the impact with synergies of scale, buying power, cross-selling opportunities, employee redundancies, or the ability to attract larger customers thanks to your new, expanded capabilities.
Naturally, buying a business comes with a significant upfront expense. But structured thoughtfully, almost any deal you’d strike should allow for the existing cash flow to more than cover any debt you take on. Your acquisition strategy may offer other advantages such as easier access to financing and a more stable financial profile, thanks to the combined value of your firms.
Recognize, too, that growth through acquisition can be a necessary defensive move, blocking your competitor from capturing valuable market share.
Of course, merging two businesses is not without challenges, particularly if you have to reorganize management teams or large employee groups. Before you buy, ensure that culture is a good fit and you have done your necessary due diligence. After that, put incentives in place to retain your highest value talent and ensure the merger is attractive to employees on each side.
Choosing your strategy
There’s no right or wrong way to approach growth. Your strategy must be driven by you and your management team based on your goals and situation. Explore your options before you write-off acquisitions as something outside your wheelhouse.
Consult a buy-side M&A advisor and then discuss your options with other trusted advisors. Consider your strengths and weaknesses and what type of acquisition would add value for both entities. A buy-side M&A advisor can help craft an acquisition plan and research opportunities for you, just as if you had an in-house acquisition team.
If you chose an acquisition strategy, do your due diligence and be ready to move ahead quickly once you’ve found an attractive target. Market activity is strong right now, and it’s likely your competitors are also out there looking.
By Scott Bushkie
Scott Bushkie is Managing Partner and Founder of DealCoach.
With more than 20 years in the Mergers and Acquisitions (M&A) industry, Scott is a recognized leader in the field, providing exit strategies, business valuations, and M&A advisory services to business owners in the lower middle market. He has successfully executed sales to domestic and international buyers, private equity firms, family offices, and strategic buyers. Follow DealCoach on Linkedin