Pros & Cons Of Business Acquisition | Should You Buy A Business?
Business acquisitions are an excellent way to grow your company, but they aren’t without their faults. They can give you instant access to a bigger market, gifted new staff, and infrastructure that would be expensive to develop, but on the other hand, they’re financially risky, time-consuming to complete, and can damage your company’s culture.
Here are the biggest pros and cons of business acquisition, so you can decide whether it’s a suitable path for your company.
Bigger market share
If you can afford it (and it makes good business sense) one of the easiest ways to defeat the competition is to buy them. Their customers become your customers, which gives you a bigger share of the market, and negates the need to battle with the competitor anymore.
If you can’t beat them, acquire them.
Access to talent
Anyone who has sat through hundreds of interviews knows how tough it can be to find talented, hard-working people. And even after going through your arduous, well-designed interview process, they can still turn out to be flops. Acquiring a company gives you access to a fresh pool of talent in which you can quickly identify the guns, get to grips with their unique skills, and utilise them to grow your business.
On the flip side, you may also inherit some less desirable team members in desperate need of professional development. This can be time-consuming and costly, but leads to a more capable team.
Access to technology and other infrastructure
Infrastructure like software, servers and manufacturing equipment is expensive, and can be valuable assets when acquiring a company. In fact, this can be the very reason for a business acquisition—the target company has infrastructure that your business needs, and it’s cheaper to simply buy the company rather than create the infrastructure yourself.
An easier way to enter a new market
Entering a new market can be slow and complex. It requires a solid business plan, thorough market analysis, and a market entry strategy, which require research, knowledge, and months to complete. If you’re wanting to expand to another city (market development), acquiring a business in that city can remove much of this work, making it easier to break into the new market. Or if you want to start selling a new product in a new market (diversification) but already know a company that does it well, you can start researching the opportunity.
A word of caution though: a business acquisition is a lot of work in itself (more on this below), so it may take just as much time and effort to enter the new market with your existing firm. You’ll need to thoroughly research each option.
Greater cash flow
Depending on the target company’s capital structure, you may have immediate access to more cash. This can improve your cash flow and make it easier for your business to meet its needs, and avoid taking on debt.
New sales and distribution channels
The internet has opened up a vast world of sales opportunities, some of which your target business may already be utilising. Whether it’s an obscure but profitable online marketplace, distribution software that connects you to clients, or another undiscovered method, inheriting new selling channels can be a fantastic way to reach new customers and boost your bottom line.
Can reduce supply in the industry
If your industry becomes saturated with competitors, and businesses aren’t doing enough to increase demand, there’ll be an oversupply of product that can lead to slashed prices, dumped products, and reduced profits. By acquiring a competitor, you can reduce the amount of products being manufactured and gain greater control over the industry’s supply and demand. Diamond producer De Beers were famous for doing this with their product. In the 90s and early 2000s, they dominated their industry so well that they were able to hoard diamonds and keep them locked away until they needed them, which kept the official supply low, and demand high.1 This allowed them to set the highest possible prices for their diamonds.
Potential for more innovation
It can be easy for a company to get stuck in the same old narrow ways of thinking. Problems are looked at the same way every time, and opportunities are missed because people aren’t encouraged to be creative. Innovation is rare in this type of situation. But when a new company is thrust into the mix, a deluge of fresh perspectives and skill sets become available, which catalyses innovation and can generate a treasure trove of profitable ideas.
It’s risky and expensive
Acquiring a business is no easy task. It requires potentially hundreds of hours in research and negotiations, and thousands of dollars in legal fees. So it can be a big financial risk that must be thoroughly assessed before taking the leap.
Most importantly, it must be completed for a clear and precise business reason that will add value to your existing firm.
It’s a lot of work
Market analysis, a market entry strategy, and due diligence are just a few of the time-consuming things you’ll need to complete when acquiring a business. Add these together and you may end up slashing months off your year—a grievous opportunity cost if the acquisition turns sour.
Be sure to do plenty of research before deciding to buy another business.
Staff may get skittish
When two businesses merge, they usually find themselves with double departments—two sales teams, two customer service teams, etc. The teams will simply merge if there’s enough work for them, but if not, there will likely be redundancies. Business acquisitions are notorious for this reason, and while executives are usually excited by the purchase, other employees may become nervous when they hear the news.
If redundancies are necessary, they can be terribly damaging to staff morale, and often end up affecting the company’s culture. After receiving investment from Telstra in 2015,2 Australian e-commerce platform Neto were given targets they couldn’t reach, and two rounds of redundancies were necessary to push the company back into black. According to people who worked there, staff morale plummeted and the company’s culture was never the same again.
A good company culture helps to attract talented staff, keeps them happy, and convinces them to stay put. So when two businesses merge, their cultures must be similar enough to successfully fuse. This helps to keep both cultures alive and can create something even more magical.
If the cultures are too dissimilar, the mismatch can cause something of an identity crisis for team members, who no longer feel that their values match the company’s, which can cause them to leave. Employee churn increases, and good talent may be lost.
As with good culture matches, you’ll need to make sure that your target company’s mission/purpose suits your own. They don’t have to be identical, but they should at least complement each other to ensure a profitable future.
Further reading and business acquisition help
- What is acquisition in business? Forbes
- Acquisitions: The Process Can Be a Problem, Harvard Business Review
- Small business acquisition process, Australian Government
- How to finance a business acquisition, Forbes
- Blaine Harden, 2000, De Beers Halts Its Hoarding Of Diamonds, The New York Times
- Sam Gopal, 2015, 2 thoughts on “Telstra Acquires E-Commerce Platform Neto”, Power Retail