Essential guide to strategic acquisitions

Large fish about to swallow up small fish

An acquisition could increase the size and profitability of your business overnight. But the process can also bring problems, draining financial and management resources from your original business.

You need a clear understanding of what you hope to achieve and whether making an acquisition is the best way of doing this.

Your strategic objectives

Expanding your business

Reducing your costs

Diversifying to cut risks

Acquiring assets

Defensive acquisitions

Beefing up management

Takeover traps

Alternatives to acquisitions

1. Your strategic objectives

Acquisitions are more risky than organic growth. Be clear about what you need, and what you expect an acquisition to do for you, before investigating possible takeovers.

A SWOT analysis helps you compare the benefits and risks of an acquisition to the alternatives.

What are your strengths?

  • Can you complement them? Can you afford to risk weakening them?
  • How good are your employees?
  • How good are your products, your market position and your market share?
  • Do you have financial muscle - for example, money in the bank, or shares in your own company which can be sold?
  • Do you have advantages in technology or production processes?

What are your weaknesses, and how could you fix them?

  • Is your market position shaky?
  • Are your finances overstretched? Are your overheads taking too high a proportion of your income?
  • Do you have any management weaknesses?

Analyse your opportunities, and how you might be able to take advantage of them

  • Do you have a solid market position, desirable products or a good reputation that could be more fully exploited?
  • Do you have a capable management team, with experience in turning round underperforming companies?
  • Do you have resources which could be used more? For example, money, plant, premises or your distribution network.
  • Are your competitors open to attack?

Assess the threats to your current position

  • How can you avoid them?
  • Are you facing new and aggressive competitors?
  • Is your market static or declining?
  • Are you over-dependent in a critical area - for example, on a particular employee or customer?
  • Are you subject to cost pressures that you cannot pass on to your customers?

2. Expanding your business

If you integrate another business into yours, both could benefit from the expansion.

There may be opportunities to cross-sell to each other's customers

  • This may be difficult if the two businesses have conflicting cultures and systems.
  • The length of the normal sales cycle customers are used to can be a major cultural factor.

You could improve the public perception of your company

  • Bigger companies are often believed to be more reliable, and you should get better brand recognition.

You should benefit from opportunities to develop other products

  • A wider customer base makes successful new product launches more likely.

3. Reducing your costs

With a higher volume of activity, you should be able to achieve economies of scale.

Stay open-minded about the kind of business you might acquire. However, the more closely related two businesses are, the more scope there will be for major benefits.

You can make better use of overheads

  • Make savings in central functions, such as finance, administration and personnel.
  • Look for similar savings on premises, distribution, sales and marketing.
  • If the companies are in the same line of business, you might make savings on manufacturing or assembly facilities.
  • It may also be possible to cut out some management salaries. But be careful - you may be cutting out talent which your business could use (see Takeover traps).

The increased size of your business should give greater negotiating power

  • You should get better prices when buying in greater volume (bulk-buying). Ask your existing suppliers for quotes, so you can judge possible savings.
  • You may be able to negotiate better terms from your bank.

You may enjoy some of these benefits even if you buy a business in a separate area

  • You can still share some resources, such as premises and distribution.
  • If the product is different but the technology involved is similar, you may be able to share production facilities.
  • If there is no overlap at all, the acquisition is unlikely to make sense strategically.

4. Diversifying to cut risks

An acquisition could help you limit or offset the risks in your existing business.

You may want to diversify your product line

  • You may rely too heavily on one product.
  • Some of your products may be coming to the end of their life cycles.

You might also want to consider market diversification

  • An acquisition could help you open up export sales, or reduce your dependence on just a few customers.

Acquisition could help even out workloads, if you have a seasonal peak in activities

  • For example, if you cater for the Christmas trade, buying a company which makes goods for the summer could add balance to your activities and improve your cash flow.

Acquiring to diversify

Your business may be well balanced and cash-positive today, but offer poor long-term growth prospects. If so, look elsewhere.

Look for an undervalued business

  • Companies at or near the bottom of the business cycle are often undervalued.
  • Businesses with underused or spare assets may offer opportunities for you.
  • You might be able to spot a company that would do better if it relocated.
  • Do not overvalue the company or its potential. Get an independent opinion.

Look for an underperforming business

  • Businesses normally underperform because of either poor management or underinvestment. The more successful a company is, the more you will have to pay for it.
  • You need to have the management resources to cope with improving its performance. You improve your chances considerably if you already have experience in turning businesses round.
  • Consider transferring effective business methods from your own industry.

5. Acquiring assets

An acquisition could save you time and money when building your business.

You might be able to acquire assets at a relatively low price

  • For example, buying a competitor might give you access to specialist machinery and knowledge.

You might be able to acquire a good distribution network

  • You could cut the time and effort involved in building a sales force, or setting up sales outlets from scratch.

An acquisition could also be a quick route to building an employee skill base

  • Be careful, as employees will not necessarily stay on after the acquisition.

Bypassing barriers to entry

Acquisitions can be particularly useful where there would otherwise be significant barriers in your way.

Technology may be protected by patent or licence

  • For example, you might not want to (or be able to) buy the company that owns a brand. But you might be able to buy a company that holds a licence to use it.
  • If you offend the brand owner (eg by threatening to compete), you may still be denied the use of the brand.

Your ambitions may be blocked by public policy restrictions

  • For example, you may not be able to get planning permission for an outlet where you want one. But you may be able to buy a business already operating there.

6. Defensive acquisitions

You can use acquisitions strategically, to block your competitors and to protect your allies.

If you acquire a direct competitor, you remove a possible brake on prices

  • You may be able to put your own prices up, or at least hold them steady.

If you acquire a business that competes for resources, you may be able to limit costs growth

  • For example, an agency that takes over a rival supplying IT staff should find it easier to get qualified people onto its books.

You might consider an acquisition to protect a trading partnership

7. Beefing up management

Acquisitions are often most useful when they bring in new blood - intentionally or not.

An acquisition can fill gaps in your management team's skills and experience

  • If selling is your strong point, an acquisition may be a good way of bringing in someone with production or administration experience - or vice versa.
  • If your management tends to focus on the short term, you might be able to bring in a long-term planner.

Be prepared to spend time with prospective partners

  • If you are planning to use their management skills, you must make sure your methods and objectives fit together.
  • People who seem to have perfect complementary talents can turn out to have a totally different agenda to yours.

8. Takeover traps

If an acquisition is going to fail, it is usually because there was not enough investigation beforehand, or no clear, agreed plan for what should happen afterwards.

Failure can be extremely expensive. Think about any possible pitfalls before making a move.

Your own business may suffer

  • Your management may be tied up with the acquisition, and overlook problems closer to home.
  • You may well find you have increased your exposure to risk (for example, if you have borrowed heavily to fund the acquisition).
  • You may have acquired assets you find you can neither use nor sell.
  • It pays to make thorough checks before buying another business.

The acquired business may underperform

  • Your management skills may not transfer to the acquired business.
  • Key employees might leave. Try to lock them in with a contract using bonuses linked to agreed profit or contribution targets.
  • Hidden problems may emerge after the acquisition. For example, suppliers may raise their prices or the market might turn.

You may run into difficulties in achieving your expected economies of scale

  • Key staff may be unwilling to move to a new location.
  • Making redundancies may be expensive, and will unsettle people you want to keep.
  • Trying to merge two cultures can be a long, drawn-out, disruptive process.
  • Allow for rationalisation costs when calculating the benefits you expect from any merging of operations.

Some acquisitions backfire spectacularly

  • Buying out your competitors may not be as ideal as it seems. Check that the sale and purchase agreement includes terms and conditions preventing the former business owners from setting up a similar venture again, in close proximity to yours.

9. Alternatives to acquisitions

An acquisition may often look like an attractive shortcut to success. But you should also consider other ways of expanding.

Build up another business from scratch

  • It may be cheaper and simpler in the long run.

Sign long-term contracts with another company

  • For example, rather than buying a company for its distribution network, contract it to distribute your products on your behalf and get the benefits without the risks.

Form a joint venture

  • It is often cheaper to get out of a joint venture than offload a failed acquisition.
  • A joint venture lets you access to the other party's management and employee skill base, without having to contribute to the overheads.


Expert quotes

"Always consider whether you have sufficient management resources to identify, negotiate, finance, manage and integrate an acquisition." - Paddy MccGwire, Silverpeak LLP

"Don't forget the 'invisible' costs of an acquisition. The time spent on searching, researching, evaluating, negotiating and fund-raising might be better spent on improving and growing the original business." - Steve Richards, serial investor and chairman

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