Acquisitions - taking over another company
Acquiring (i.e. buying / taking over) another company can be a fast track to business growth. It can give you access to new customers, distribution channels, skills and knowledge, while putting more resources at your disposal (e.g. personnel, additional branches, intellectual property and so forth). An acquisition may also help you to develop your own products or services.
But with such a great opportunity does come risk. There’s no magic formula to guarantee a smooth ride, but with a considered approach you can keep the risks manageable. Here are the key steps to start you on that road.
I’m thinking about an acquisition. Where should I start?
The first thing you need is a specific strategic rationale. There should be a clear reason for making the acquisition of that particular company at that particular time. If the reason for a merger or acquisition is vague, like ‘to grow the business’, it’s worth giving it more thought. Your specific reason and objectives will ultimately be the driving force of all decisions around the acquisition, and will allow you to measure your success later, so be as clear on this as possible.
So what are good reasons to make an acquisition?
They are six basic goals by which you can measure success. Your acquisition should aim to achieve at least one, and ideally more. But you need to be clear which of the goals apply in your case, as this will help you find the right business to take over.
You believe you can improve the performance of the target company
A badly performing business may represent good value – if you have what it takes to turn it around. Lots of large firms do this, but it’s a margins game. Before attempting it, you need to be absolutely sure of your sums (speak to an accountant about those) and your capabilities.
You want to remove excess capacity from the industry
If you’re in a mature industry in which supply is outstripping demand, acquiring a competitor gives you the opportunity to streamline the supply more effectively. Oil companies, for example, can merge and collectively shut down their least efficient plants.
You can help the target company to penetrate the market
A smaller target company may be struggling to penetrate the market. What they may be missing is your negotiating power – while you in turn can benefit from the particular qualities they have. Together, you stand a much better chance of securing the big, lucrative contracts.
You want to acquire new skills or technologies
By acquiring a company with the skills or technologies that your business doesn’t have, you can expand or enhance your own product offering. It can be far quicker, cheaper and more effective to acquire these skills and technologies than to develop them independently.
You see the opportunity to scale a scalable business
This is most applicable to smaller acquisitions, because many large companies are using all of their resources. If your business is unable to improve margins by scaling down, it can be a smart move to acquire a smaller business and increase the team or equipment to reduce operational costs.
You want to pick a winner
If you can spot a young business with a huge amount of potential, it can result in a really lucrative acquisition. Some of the most successful acquisitions involve a large company acquiring a startup business and helping it grow and develop. This can be a winning strategy, as long as the target company can keep the magic alive.
How should I go about it?
So you’ve decided to make an acquisition, then start looking around at the companies that are available. Right?
Wrong! That’s a reactive approach. Taking this approach means you’ll only find a limited range of opportunities that might not be the best fit for your long-term business goals. Opinions differ on the best way to acquire a business, but broadly speaking the key steps are:
Pick a team. Within your company you should have a working group with representatives from each area of the business. They need to be able to work together and communicate clearly from the off.
Make a plan. Why are you doing this? What are your specific objectives? How will you finance the deal? Consider the list of goals above and make sure your plan is designed to meet at least one.
Name a price. Value is a tricky thing, and it’s hard to nail down what the right acquisition is worth to your company. You need to understand the financials inside out, which is when a good accountant is essential. A solicitor will help make sure your contracts are watertight, and you’re also need to think ahead about how you’ll raise funds if you need them.
Ultimately, the golden rule of acquisitions is ‘Be 100 per cent sure of why you are doing this’. With your specific goal fixed in your mind, you should be able to press on through each challenge even when things aren’t going your way.
Now find out about mergers and how they’re different from acquisitions.
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