A regular question that arises in client meetings is about objectives for growth, and how they can be achieved. Here are three ways to do just that:
1. Organic growth
, in which the business expands naturally over time, increasing its product range, customer list, geographical reach, or by process improvement.
2. Acquisitive growth , in which buying another business allows for rapid expansion of operations.
3. Joint Venture , in which all the risks associated with a new venture are shared with a third party.
When considering growth by acquisition, it is important to consider a number of strategic factors. These should not only cover the financial aspects of the proposed growth, but also the non-financial factors, which if overlooked, can lead to an unsuccessful acquisition.
In fact, separate studies by leading specialist consultancies have all shown that failure rates can be as high as 86% for larger acquisitions. Alarmingly, this research also shows that only 17% of acquisitions are deemed a success (i.e. they add value to the newly combined entity).
Common sources of these failures can be:
• Failure to identify the right target
• Failure to identify cultural differences
• Failure to identify and select the right management team
• Failure to integrate
• Overestimating synergies for the newly combined business
• Failure to effectively communicate (both internally and externally)
• Declaring the acquisition a success too soon
Perhaps surprisingly, we can see from these results that acquisitions rarely fail because of pure financial reasons. This means appropriate planning to identify non-financial aspects is vitally important.
A useful nugget of information from these studies suggests that if a business undertakes appropriate due diligence, which includes consideration of non-financial aspects, they are 6% more likely to be a success than those that don’t.
The following questions, therefore, focus on some of the most vital non-financial aspects of acquisitive growth:
1. Is it the right time? Acquiring a company in any growth stage will present different opportunities and threats to buying a business in its maturity. For example, a high growth start- up presents potential opportunities to move into new fast-growing markets, but there may be significant cash requirements at this stage of the target company growth curve. By contrast, a mature company may require less cash input but may not deliver future growth in its own markets.
2. Horizontal or vertical acquisition?
Is the acquisition intended to consolidate the market for the existing business (horizontal), or to improve a supply chain or sales stream (vertical)? Where an existing market is unlikely to significantly grow, horizontal acquisitions can help to consolidate market share, which should lead to greater efficiencies and cost savings. Similarly, it would be expected that synergies could be achieved to improve efficiencies by securing a supply chain through vertical acquisition.
3. Will there be access to new products, markets, or sales platform?
If so, the acquisition could be cheaper or quicker than developing the existing business. It can often be said that companies that do not continue to develop new products, markets, or ways of selling will eventually fail or contract. Keep in mind that there are many examples of this, such as Kodak, Nokia, and many high street retailers failing to embrace online sales platforms.
4. Are there benefits relating to talent and technology?
Access to new, appropriate talent and technology can often help to develop new products, markets or sales platforms that would otherwise be unachievable with existing resources. Many high street chains have looked to purchase online fashion ventures as a route to an immediate online presence, rather than developing their own.
5. Is the right management structure and culture in place?
Both the existing business and the target company should have the right management structure and similar cultures, to allow a smooth takeover or absorption into the existing business. Failure is more likely without a clear structure, or with significantly different cultures that may inhibit the changes required to integrate successfully.
By addressing these non-financial aspects at the outset of any potential acquisition, some of the common sources of failure outlined earlier can be addressed and eliminated.
Business owners should therefore be encouraged to discuss acquisition growth strategies with a professional advisor, ensuring they consider key non-financial areas instead of skipping straight to the financial aspects of a transaction. Get these right, and the acquisition is more likely to be successful.
At Rickard Luckin, our values of Passionate, Personal and Professional mean we have a detailed understanding of a client’s business, and are able to work closely with them to identify the right strategy for their growth. Ultimately, we understand that growth can be a challenging process, so we act as a trusted advisor to help deliver successful outcomes for our clients.
If you have any further questions or would like to discuss the matter of buying a business in more detail, please contact our Corporate Finance Associate, Mark Brooks at email@example.com or on 01245 254266.
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