The pros and cons of growth by acquisition

Acquisition allows you to accelerate your growth plans by acquiring businesses, to expand and grow revenues and profits. However, it can be risky if you let the weight of the transaction distract you from your business-as-usual operations, or if you fail to carry out the required due diligence on the target business and end up firefighting issues as they arise. To support you with your decision on whether to grow your business by acquisition, we highlight the key advantages and disadvantages below.

Advantages

Timing

Acquiring an already fully functioning business is normally a much faster process than reaching that position yourselves. It provides you with the chance to acquire resources, skilled staff and additional clients. You’ll also acquire your target business’s brand reputation, which is a valuable asset that can help to increase the awareness of your own brand and reduce the risk of new service or product development in future.

Improved results

You and your shareholders may be eager to make step jumps in the growth of the business. Making an acquisition normally results in immediate increases in revenues and profit, helping you to meet your growth targets as well as those of your investors.

Market share

Acquiring a business in your existing market can significantly build your market presence. Aligning your existing market synergies with your newly acquired business can give your business a competitive edge.

Business synergies

The best acquisitions are synergistic, where the profits (and value) of the whole is greater than the sum of its parts. Growing by acquisition means that the acquirer can reduce the overall cost base by combining back-office functions, such as accounting and marketing. The businesses may also provide synergistic services where they service either similar or the same clients. By merging they are able to offer an improved service and maximise revenues and profits.

Valuation

Acquirers can benefit for multiple arbitrage. Companies usually sell for a higher multiple when they are simply part of something larger. An acquirer can therefore purchase a £1m EBITDA business for 5x and hypothetically sell for 7x as part of the whole.

Disadvantages

Cost

Purchasing a successful and profitable can be expensive. Careful consideration has to go into how you will be funding the transaction, whether it be through reserves, debt or other external fundraising. Either way it will be a drain on resources in the short to medium term.

Rising expenses

The expenses incurred when acquiring a business can escalate rapidly if you proceed without seeking professional advice. There is often snagging around the transaction mechanics and the Sales and Purchase Agreement (SPA), which can cause unnecessary delays and exceeding costs, especially in the situation of a hostile takeover bid.

Risk

Without professional due diligence support, you run the risk of acquiring a business that doesn’t perform as well as you expect it to, and you’ll be responsible for fixing any issues which the new business brings with it. There are also integration risks, where different cultures meet and could raise internal issues.

Distraction

Undergoing an acquisition is likely to be very time consuming for both you and your Finance Director. Any challenges or extended timescales can add further distraction and you may find it difficult to maintain control over your existing responsibilities while also trying to execute a successful transaction.

Key takeaway

To combat the risks and maximise the potential outcome of an acquisition, we recommend that you seek professional advice before getting started. This support will help you to identify the right target business and expose any red flags before they cost you time and money, and also help to smooth the transaction and prevent delays due to inexperience or the lack of specialist advice.

How we can help

As an experienced acquisition adviser, we have an in depth understanding of the process and can quickly identify any potential issues before they affect the transaction. We often act as a negotiator to ensure the process is as smooth and fair as possible, and can help to manage shareholder expectations with the preparation of a fully integrated financial model.

For more information, or for advice tailored to your business, please get in touch.