How to grow your business through acquisition
Throughout my career, I’ve had the privilege of buying and selling over a dozen businesses. From working with clients on acquisitions and sales to navigating my own deals, I’ve learned that growth through acquisition is a powerful strategy when executed correctly. It’s not just about expanding the business, it’s about creating synergy, accessing new markets and leveraging the strengths of different organisations.
Identifying promising acquisition targets
The first step in any acquisition is identifying the right target. There isn’t a one- size-fits-all criterion because it largely depends on what you aim to achieve with the acquisition. Let’s take the advertising industry as a case in point. Historically, major networks like WPP had clear financial thresholds. For instance, about 15 years ago, an agency needed to achieve a £1 million EBITDA to be considered as a possible acquisition opportunity by a giant like WPP. Today, that threshold is likely closer to £2 million.
Profitability is crucial as it indicates that the target company has established robust systems and processes. These systems are essential for scaling operations. However, acquisitions aren’t solely about boosting profits. They might be strategic, aiming to open new markets or acquire unique talent – a concept known as “acqui-hiring.”
An ideal acquisition target should be growing, profitable and cashflow positive. It should have strong management information systems, which demonstrate good governance. Additionally, examining ratios such as the staff cost ratio is important. For instance, in an agency with £5 million in revenue, ideally, 60% should go to staff costs, 20% to other overheads, resulting in a 20% profit margin.
The challenges of acquisitions
One of the biggest risks in both buying and selling businesses is taking your eye off the ball of your core operations. The acquisition process is time - consuming and can distract from the day-to-day running of your business. Preparation is key – creating a virtual data room to streamline the process through fast, secure data sharing can help.
Due diligence is critical and should be approached like peeling an onion. Start with the outer layers to gauge if the deal is worth pursuing before diving deeper into financial, commercial, legal and cultural due diligence.
Misalignment of culture is a major reason why acquisitions fail post-closure. Ensuring that the cultural fit is right is paramount. As the business author and motivational speaker Simon Sinek says: “Mergers are like marriages. They are the bringing together of two individuals. If you wouldn’t marry someone for the ‘operational efficiencies’ they offer in the running of a household, then why would you combine two companies with unique cultures and identities for that reason?”
Structuring the deal
Structuring acquisition deals to align incentives and maximise value creation is another critical aspect. A common pitfall is paying the full purchase price upfront. This can lead to the founder losing motivation once they have their pay-out, which can be detrimental if you’re relying on them to help transition the business. I’ve seen small, funky companies flounder post-sale, as their leadership team and employees struggle to deal with a disengaged founder and an excess of red tape imposed by the parent firm.
Earn-outs, where a portion of the purchase price is deferred and tied to future performance metrics, can align interests. For example, if a founder is incentivised to grow the business post-acquisition, they are more likely to stay engaged and drive growth. This approach can mitigate risks associated with immediate pay-outs and encourage a growth mindset rather than cost-cutting.
Macroeconomic turmoil – should you be concerned?
Given the global economic challenges of inflation, supply chain issues and geopolitical tensions, it’s unsurprising that market uncertainty might give pause to anyone considering M&A deals. But with this being the ‘new normal’, it seems many dealmakers are pressing ahead regardless. A 2024 Deloitte M&A Trends survey, for example, shows that 79% of corporate leaders and 86% of private equity leaders expect an increase in deal volume over the next 12 months. Similarly, a 2022 McKinsey report found that the businesses which perform best are those that defy conventional wisdom and embark on bold M&A moves regardless of economic downturns.
The strategic advantage
Growth through acquisition offers several strategic advantages. It allows for rapid expansion, access to new markets and the acquisition of unique skills and technologies. Unlike organic growth, which can be slow and incremental, acquisitions provide a more immediate scale and market presence. However, it’s crucial to approach each deal with a clear strategy and thorough due diligence to ensure it aligns with your business objectives and enhances overall value.
Advice for aspiring acquirers
For SMEs considering growth through acquisition, my advice is to seek experienced support. As the saying goes, plan for the divorce as well as the wedding. In other words, ensure all scenarios are addressed upfront in the contractual process to align expectations and avoid conflicts later.
Building a pipeline of potential acquisitions is also essential. Just like with talent recruitment, having multiple options allows for better decision-making and negotiating power. It’s far better to turn down acquisitions than to feel pressured into a bad deal due to a lack of alternatives.
Acquisitions are not without risks, but when done right, they can be a highly effective growth strategy. By focusing on the right targets, conducting meticulous due diligence and structuring deals to align incentives, businesses can achieve significant scale and profitability. As we navigate an ageing population – where business owners might be looking to retire and sell a good company at a reasonable cost, for example – I see a landscape rich with acquisition opportunities and market dynamics favourable for those who can execute effectively. Growth through acquisition is a powerful tool in the business arsenal, offering a path to scale that could rapidly accelerate an SME’s potential.
