21 Jun Pros & Cons of Growing a Business Through Acquisitions
Acquisitions provide business owners the opportunity to grow their business faster, achieve their goals sooner and avoid the often painstaking slowness of organic growth. With some preparation and good decision-making, the business owner can realize a level of growth and success not otherwise available.
Other benefits include:
- Acquiring talent to assist the organization
- Gaining the ability to move into a territory which has a distinct need for the owner’s services
- Establishing synergy between company’s products
- Increasing profits
- Increasing the value of the company dramatically
Some acquisitions involve rolling up or absorbing competitors, while others bring a product or service which has legs to the existing customer base. Conversely, the acquired company has customers who have a need for the buyer’s products. If done with proper diligence, the acquisition should be a win-win situation (U.S. Department of Commerce).
But this doesn’t happen without risk.
What are the risks associated with acquisitions?
Many of these risks can quickly take down both companies.
- Merging two typically different cultures
- Increasing the debt load
- Allocating capital for additional training
- Integrating the two companies’ accounting systems
Often, focus is the main concern. During a merger, it’s vital that the exiting owners continue to effectively operate and place the responsibilities of their core business at the top of their priority list.
Another unknown factor to consider is how long it will take for the anticipated benefits from the two company synergies to be realized. Sometimes they are never realized and many times not maximized. Consider that there are significant valuation benefits to be derived from accelerated gross and net incomes (Forbes magazine).
Preparation is key before any contemplated acquisition. It is not uncommon to examine and review several or dozens of potential deals before pulling the trigger. Most owners who are unfamiliar with acquisitions need to experience and evaluate multiple opportunities. You must have conversations with professionals in your industry, such as your trusted advisors, other business owners and anyone who can help identify the qualities which would be ideal for maximum benefit to be realized.
Acquisition Case Study: Company Zippo
Zippo was a manufacturing company in Nassau County NY, creating products for the airline industry and the medical industry. In addition, it had many government contracts for military vehicle parts. This company had been manufacturing for 30 years with the same ownership at the same location. They had 12 quality machinists trained in this highly skilled manufacturing process.
The acquirer was Mr. Long whose company is also a manufacturing company. He had recently sold a piece of property, had excess cash and thought he could grow his business through an acquisition. He had space in his facility to accommodate an addition.
Mr. Long purchased Company Zippo, paying a premium for the business. He realized after careful consideration and evaluation that the talent in Company Zippo would enable him to accept work previously declined. In addition, his machinery was newer and twice the speed of Company Zippo, permitting more output, but requiring retraining of the inherited staff.
Prior to the acquisition, all of Company Zippo’s employees executed an employment agreement requiring them to stay for a period of time ranging from one to three years. They were paid a bonus when the acquisition was completed.
As a result, Mr. Long:
- Filled his excess capacity
- Improved the profitability of the acquired company
- Employed a higher quality staff
- Added value for Zippo’s owner, assisting him with retention two days a week
Company Zippo sold at a premium and its building was sold to a separate buyer. This successful outcome was the result of synergy, preparation, research and evaluation of what type of acquisition would result in the maximum benefit to the business.
What is an acquisition earnings target?
Consequences for transactions which might have not gone as planned depend on the contractual obligations of the parties. Many deals today have an “earnings target” built in with adjustment in the form of increased or reduced compensation if the target is either exceeded of not attained. In most acquisitions, unless there was fraud, the differences are minor and remediated.
It is a generally accepted policy for the acquired company ownership or management to be retained for a period of time in order to preserve continuity of operations and retention of key customers.
Growing your business through acquisition
It is clear that the ability for an organization to grow through acquisition is greater today than ever before. Considering the anticipated business exodus of many baby boomer business owners, the opportunity should become increasingly enhanced to make an acquisition which fits the needs and provides a vehicle to supplement any organic growth in a company. The “Growth through Acquisition” philosophy provides terrific benefits for those who are prepared, patient and diligent.
Anthony J. Citrolo, CPA/CBI, Certified Merger & Acquisition Advisor
New York Business Brokerage (NYBB) specializes in the confidential sale, acquisition and valuation of small to mid-sized privately held businesses. Since 2003, NYBB has been dedicated to serving clients with professionalism, integrity and confidentiality. As an innovative leader in the business brokerage industry, NYBB continues to raise the bar by establishing itself as one of the most trusted and respected names in the business buy/sell marketplace.