Business Acquisition as a Growth Strategy: Pros & Cons

Business Insights

One of the simplest ways for a business to achieve substantial growth is to acquire another company. Ordinarily, expansion would mean either the purchase or rental of another premises, and the hiring of a whole new team. This comes with a great deal of risk, as staff need to be trained, market share needs to be established, and the expenditure can take a bite out of operating capital.

This all makes the purchase of an established company an attractive proposition for ambitious business owners looking to expand. There are however, several things to consider before looking to purchase another company. As with any growth strategy, there can be some drawbacks among the benefits. Rick Smith, Managing Director of Forbes Burton, a business acquisition consultancy, looks at the pros and cons that potential buyers can expect.

The benefits of acquiring a business

    The hard work has been done

Fitting out the office, hiring staff, making the local market aware of your existence - all of this has been done by the previous owner. This saves a lot of time for directors looking to hit the ground running.

    Increase market share

When you acquire a competitor, not only do you increase your company's presence, but you also eliminate a rival in the process. This makes for a significant increase in real market share. With a standard expansion, there's no guarantee that you'll capture a larger share of customers with your increased size, but an acquisition often sees a new client base captured alongside.

    Access to skilled staff

In sectors that call for skilled workers, there can often be a dearth of talent to choose from when hiring for new positions. In the case of an acquisition, you can obtain skilled and experienced staff without the need to pay over the odds to pry them away from their existing position.

    Provides proof of success

Clients don't want to do business with companies that may not be around in a year's time. That's why signs of continued success can put a client's mind at ease, and make them more likely to deal with your business. An acquisition demonstrates that rather than merely surviving, your business is actively looking for ways to grow. This can also be helpful for appeasing stakeholders and attracting new staff.

    Easier access to more capital

As a result of your business becoming larger, lenders are more inclined to offer higher levels of capital. These funding and financing options can open up even more expansion possibilities if your company continues to grow.

    Skill sharing among staff

Even between two very similar businesses, there's bound to be a number of differences in the way that each set of staff operate. This presents the opportunity for both parties to learn different methods from one another. By learning how another business performs the same tasks, your staff can potentially streamline their processes and become more rounded workers.

    Inherit advantageous contracts

An acquisition usually includes every facet of a business for better or worse, including existing contracts. This can be beneficial as they may have access to deals that no longer exist for new customers. The acquired company's relationships with suppliers and other services may be useful to take advantage of too.

Drawbacks of acquiring a business

    Differences between staff

Ideally both workforces involved would learn from each other's processes and refine their day-to-day operations. On occasions however, certain staff may stubbornly refuse to alter how they work, or even feel protective of the methods they've been accustomed to. This can lead to disagreements and staff issues that need to be resolved before any divisions can appear.

    Costs involved

Even though an acquisition can sometimes work out less expensive than a standard expansion, it will almost certainly still involve a sizeable outlay. Make sure that the amount you need to pay doesn't stretch your company's resources too far, whether that's a one-off payment or instalments. Be prepared to operate with a reduced budget for a little while afterwards.

    Absorbing historical issues

When acquiring another business, you adopt every aspect, warts and all. While that can result in picking up strong contracts as mentioned earlier, it can also bring about unknown risks. Thorough due diligence needs to be performed beforehand to ensure that buyers are aware of as many issues as possible before agreeing to any deal. Disputes between the business and employees, customers, or suppliers can drag on for years, and cause unneeded complications for any takeover.

    Overlap of roles

It's likely that by joining two businesses together, there'll be some duplication of job roles. This brings about a raft of problems. For example, how do you decide on who should be HR manager, now that you have two experienced HR managers.

    Job losses

Because of the issue above, you may need to lay some staff off. This can obviously have an impact on staff morale, and cause disruption should a popular staff member be made to leave. The insecurity staff may feel during an acquisition may also lead to some looking elsewhere for work, potentially strengthening competitors in the process.

As long as business owners go into the acquisition process with their eyes fully open, it can still be a fantastic way to provide quick and substantial growth for many companies. Working with a reputable business consultancy throughout the process will reduce the risk of any problems occurring later, and ensure that everything runs smoothly. Bear in mind that any growth strategy will involve some drawbacks, and almost all will involve an initial outlay too, so acquisition remains one of the best ways to expand your operations. If you're interested in potentially acquiring another business, Forbes Burton offer free, no-obligation consultations to point you in the right direction.