Should You Buy Your Biggest Competitor?
Growth through acquisition is a very viable option for small and medium-size businesses. Should you buy a business?
We routinely hear on the news about huge companies merging with and acquiring other huge companies in deals measured in the tens of billions. But just a few minutes of research will show even novice entrepreneurs that growth through acquisition is a very viable option for small and medium-size businesses as well.
The question is, is it the right growth strategy for your company? Or are you better off expanding in more organic ways – by opening satellite locations, franchising, or focusing exclusively on aggressive sales and marketing tactics?
There’s an interesting conversation to be had around this topic for every unique business situation, and there’s truly no “right” answer that fits every circumstance. Let’s investigate some of the pros and cons of growth through acquisition versus more organic business growth so you’re in a better position to make that decision yourself.
The pros of organic business growth
Growing your business organically – in the most natural, progressive way possible – offers the most control over how that growth occurs. That doesn’t mean you’re going to completely avoid unexpected setbacks or even the stress of “too much success” at times. But if you’re focused on continually improving your marketing efforts, improving your product or service, and identifying new or more profitable markets you can successfully enter, you’re going to find that growth is more predictable and controllable over the long term.
There’s also a real sense of pride and accomplishment that comes with growing a business from the ground up with your own (and your team’s) efforts to account for its success. Many entrepreneurs couldn’t imagine doing it any other way.
The cons of organic business growth
The biggest potential negative aspect of relying on strictly organic growth is that it’s usually very slow. It may take years for the market to evolve enough – and for your business to be able to afford – to justify a second location or expansion into a new geographic area. Getting to the point of opening a third location will probably take less time than the second one did, but it could still require years of planning and effort to get there.
This isn’t a hard-and-fast rule, of course. There are plenty of examples out there of restaurants, clothing stores, and speciality service businesses that seemed to appear out of the blue and suddenly explode across the map as they took over the market. But oftentimes, apparently explosive expansion – when it’s sustainable – is far more controlled and organic than it appears from the outside. And there are plenty of other stories of companies that went after aggressive organic growth and ended up biting off more than they could chew, collapsing before they could realise the rewards of the strategy.
The pros of growth through strategic acquisition
Unlike slow and steady organic growth, growth through acquisition or merger is generally much faster and – if done right – can yield several other almost instant benefits that can help make that rapid growth sustainable.
David Annis and Gary Schine, authors of the book, “Strategic Acquisition: A Smarter Way to Grow a Company,” explain the benefits of acquisition this way:
“Growth through acquisition is a quicker, cheaper, and far less risky proposition than the tried and true methods of expanded marketing and sales efforts. Further, acquisition offers a myriad of other advantages such as easier financing and instant economies of scale. The competitive advantages are also formidable, ranging from catching one’s competition off guard, to instant market penetration even in areas where you may currently be weak, to the elimination of a competitor(s) through its acquisition.”
So this method of growth offers a two-fold growth process:
Grow your company’s market, brand reach, audience, sphere of influence, and supply chain while also eliminating or overtaking your biggest competitor, either by acquiring them directly or by acquiring one or more smaller competitors until your company is the largest in your competitive market.
The cons of growth through acquisition
Growth through acquisition is rapid and can yield quick results. But the internal atmosphere that develops in the time immediately preceding and following an acquisition or merger can present several management challenges that could hinder that rapid growth or plant the seeds of future failure.
If the merger or acquisition requires reorganising of the workforce and/or management team in one or both companies, you may have a significant amount of stress and hard feelings to work through in the minds of those who stay. There can also be a latent sense of betrayal or disappointment on the part of employees, partners or owners of a company that has been acquired, especially if they agree to the arrangement because they’re facing a do-or-die situation.
Merging two distinct company cultures and methods will always present challenges, but a successful acquisition needs to get through these and other potential problems quickly and effectively if it’s going to successfully grow and evolve from the process.
How to choose what’s right for your business
The question of whether to buy your competitor or open up a satellite location – to grow organically or inorganically – must be answered individually by each business owner based on their own unique circumstances.
In both cases, thorough, strategic planning is required to ensure growth is both attainable and sustainable over a long enough period to achieve the company’s goals and justify the expense and effort required.
It’s usually best to explore both options thoroughly before heading too far down either path. Discuss your options with your lawyer, business broker and other trusted advisers to make sure you’re considering all the pertinent details.
Then research businesses for sale in and around the areas you’re considering for expansion and determine whether buying one or more of these businesses will help or hinder progress toward your growth goals. Keep a sharp eye on your competition – both large and small – and look for where synergies can be identified or created so that a merger or acquisition creates added value for everyone involved.
Once you’ve done your due diligence and you’ve settled on the best path, move ahead decisively.
10 Biggest Mistakes Companies Make in Growing Through Acquisitions
Deal fever happens when you’ve got so much time, energy and emotion tied up in a deal that your focus shifts from doing the right deal, to simply getting a deal done.
With an increasing numbers of private companies coming on the market caused by later stage baby boomers selling their companies, the strategy of growing your business through acquisitions is becoming very viable and attractive.
In fact, if properly executed, we have seen companies use this strategy to grow their businesses 10 fold and greater in under five years.
The dynamics for growth through acquisitions is very compelling and include:
- With the increasing numbers of private companies coming up for sale, pricing and deal structuring can be advantageous to the buyer.
- Access to capital – from banks, subordinated debt providers, and private equity – is much easier if you are seen as a capable, rapid growth company.
- Word often gets out in the market that you are an “acquirer” and retiring entrepreneurs will often seek you out to help with their liquidity.
- Top talent is easier to attract.
The synergies – both in cross selling and cost savings – can have a huge impact on your profits.
While the potential gains from this strategy are enormous, the risks are very real. Studies of public companies’ acquisitions have shown that the majority of acquisitions don’t add to shareholder value.
And given the relatively limited resources available to most private companies, these risks can be even more dangerous.
Some of the biggest mistakes we see with companies who decide to grow through acquisitions include:
Chasing deals & taking your eyes off your business
Studies show that over 50% of buyers spend between 10 -20 hours a week searching for 6 months to a year to find a suitable business to acquire. You may think that you know all the players in your industry, so it will be faster for you, but to initiate a discussion with a variety of prospective targets, strike a deal, complete the due diligence, arrange the financing and “paper” the deal is incredibly time consuming.
But because the potential upside to a well-executed acquisition is so compelling, many private companies get caught up in the excitement of the “hunt” and the core business suffers. Acquiring companies is very time consuming and eats up a lot of your internal resources, and all this can come at the expense of your existing business.
Getting Deal Fever – not listening to your due diligence
Deal fever happens when you’ve got so much time, energy and emotion tied up in a deal that your focus shifts from doing the right deal, to simply getting a deal done. Even seasoned private equity pros get deal fever – it’s hard not to.
We’ve seen too many deals where the buyer has ignored the negatives that came out from the acquisition due diligence process and lived to regret it.
One of the best pieces of advice on this point came from a seasoned private equity investor who told us “Some of the best investment decisions I’ve ever made were ones where I walked away from the deal”.
Paying too much cash upfront & taking on too much bank debt
Companies do this because they either (1) succumb to Deal Fever, or (2) get too aggressive in their views on future performance.
Things always take longer than you think. And you are never 100% sure of the reaction that your new customers will have to the acquisition.
While the seller will pressure you for more cash up front, you need to structure a deal that ensures that you get what you are paying for. And in private company acquisitions, this normally requires payments to the seller that are tied into certain future performance – sales levels, EBITDA levels, key suppler support. So you’ll often see that a large amount of the “purchase price” is in the form of delayed payments to the seller, often varying with future performance of the acquired company.
You may find that your bankers are surprisingly supportive of your acquisitions, since they get to lend you more money to what they believe will be a stronger company post-acquisition. But be careful about taking on too much bank debt; if there are hiccups with the integration of your newly acquired company you don’t want to be dealing with a nervous bank manager at the same time.
Not properly evaluating the soft points
We seldom see a proposed acquisition that doesn’t look great on paper – increased sales through cross selling, stronger gross margins from better supplier terms, and reduced selling and administrative costs from merging two back offices. All good on the financial spreadsheets – but they could be all imaginary and evaporate in a puff of smoke if you haven’t taken into account the “soft” points of the acquisitions.
And the biggest “soft” risk relates to people and cultures. Is there a culture fit between your two organisations? We see too many acquisitions stumble because the acquirer is so focused on realising the synergies that they ignore the people issues, thinking that these will take care of themselves.
The reality is, when a company is acquired, no matter how small, there is a very high degree of uncertainty and, yes, fear. And not only in the company being acquired but sometimes within your own company as well, as roles and expectations are altered and responsibilities shift.
Remember that growth through acquisition can be fast and furious – and very disruptive for the people involved. And it’s your people that will dictate the ultimate success of your company.
Failing to have an integration plan & ignoring the importance of the first 100 days
Your first 100 days post acquisition are critical to ensuring that you have a successful integration and that the hoped for synergies between your two companies are realised.
In a change environment, people are looking for clear guidance and action. They are expecting that change is going to happen, and this make them anxious. And each day that you delay addressing their concerns, they becoming increasingly more anxious and less productive.
You should spend as much time mapping out your first 100 days as you did in doing your acquisition due diligence. While we see very few people who have the discipline to do this, those that do reap the rewards.
Not taking the tough decisions
Restructuring experts will tell you that it’s far better to take action than it is to “wait and see”. You’ll find that some of the people that you’ve acquired, as well as some of your own people, can’t make the jump to the next level. People expect change when an acquisition occurs. If you’ve decided that a person can’t “cut it”, it’s better for you, for the person in question, and for the people around them that you take action.
Often it’s not 100% clear and you’ll be inclined to give them the benefit of the doubt for a few more months, or you’ve got too much else on the go to address an issue that is not urgent. Experience tells us that, while not perfect, it’s better to act now.
You can’t delegate
Experienced bankers and private equity investors know that one of the biggest risks for many small private companies is too rapid growth – and entrepreneur’s inability to morph from an entrepreneur to a manager. For many entrepreneurs, the need to have their hands on all aspects of the business is in their DNA. This simply doesn’t work if you are going to double your business every 2 to 3 years.
If your are honest with yourself and realise that you have difficulty delegating key roles to others, then a strategy of growth through acquisitions may not be for you.
But if you are determined to go down the acquisition path, then reread #3 above, Paying too much cash upfront & taking on too much debt, and make sure that when the inevitable bump in the road occurs, that your debt load is small enough so as not to have your banker breathing down your back.
Failing to upgrade your talent pool
Not all people can evolve to the next level. And growing businesses need more skilled people than stagnant companies do.
Your focus post acquisition is often on paying down the acquisition debt. So owners often say that they can’t afford to bring on new talent. But the reality is that you can’t afford not to. Rapid growth generates inherent risks that need to be continuously evaluated and monitored – without skilled people to do this, you are jeopardising everything that you’re working for.
Consider the upgrading of your talent pool as simply another acquisition – an internal acquisition that could likely be your most successful.
Overestimating the synergies
Synergies from acquisitions are normally found in three areas:
Cross selling to the two companies’ customers;
Enhanced gross margins from better buying power; and,
Expense savings created when combining two companies’ selling, general and administrative activities.
On paper, these can look very exciting and can push you to do a deal. Experience tells us that actual synergies can fall well below anticipated synergies.
And that’s fine so long as you’ve not locked yourself into future payments (to the bank or to the vendor) that you can’t get out of should the synergies be less than expected. Stress test these synergies in a financial model back to your future debt service requirements – this will drive home the risks of overestimating the hoped for synergies.
Going after the next deal too quickly
This is the next phase of “Deal Fever”. You’ve done your first deal (and enjoyed the “rush” of the deal) and you’re starting to see your growth vision realised, with you and your financial partners all excited about the future.
And now you want more!!
This may not be as easy as it first looks. Think about you first 100 day plan and make sure that you’ve nailed down this first acquisition before embarking on the next. Making sure that your two organisations are now acting like one and that your new customers fully embrace you will take longer than you think – so take your time and get it right. There are lots of potential acquisitions out there that are not going away. A disciplined, patient and methodical acquisition strategy is your ticket to success.
For those looking to SCALE, Acquisition has GOT TO BE the quickest and most successful route to achieve this. My good friend and colleague Guy, has been doing this successfully for a number of years now, and is currently working towards a £100M Business Portfolio!
Once you have chosen the RIGHT route for you to SCALE, get in-touch and lets have a conversation about the help, support, guidance and accountability both you AND your team are likely to need in order to transition into this market effectively, efficiently and in line with your strategic objectives to achieve your SUCCESS SUMMIT.