Growing by Acquisition

Organic growth is not the only way to build a company. Some entrepreneurs, seeing opportunity for more rapid growth, look to make acquisitions. Typically, this is done to expand a geographic or a product market. Let's look at a couple of examples.

A bagel store/restaurant owner (Moe) has been in business for five years. His sales have grown quickly in the first three years and then pretty much leveled off during the next two.He doesn't want to change his product mix too much because he doesn't want to try to be too many things to too many people.

Moe surveys his customers and finds that 85% of them live within 5 miles of his store. Looking 10 miles east, which is an area similar to that in which his shop is, he finds no bagel shops. Looking 10 miles west he finds a shop very similar to his. He speaks to the owner of that shop who might be willing to sell.

Thus, he has a decision to make. What would it could to start a new operation from scratch as compared to buying an existing operation? All things considered, Moe decides to buy rather than build.

The second situation involves a small manufacturer (Gladys) who sees an opportunity to expand product mix by buying another company which manufactures products in an "adjacent" field, owns its own tooling and sells to a totally different customer base.  Gladys sees synergies that will cut cost and will enable cross-selling.

Growing by acquisition can work and can add to the top line and the bottom line. But, the buyer needs to be savvy and detailed to understand exactly what the assets are that are being purchased. Are the cost synergies real? Have I dug deep enough to know for sure?

Due diligence is critical in making a purchase. Many think it  only involves finances. But it also includes  understanding the customer base, the pricing, the employees, the company culture and a number of other factors.

Looking at the Fortune 500 and their acquisition history, it is clear that it is not a sure-fire prospect. Some of the studies show that 80% of acquisitions do not turn out as planned. If these companies, with their sophisticated processes, their legions of accountants and lawyers, and their acquisition experience, only succeed 20% of the time, what are your prospects?

Sure, there are less moving parts, less complexity , fewer people and  less sophistication to decipher in our examples. But danger still lurks within. We will discuss those dangers in future posts. 

Comments

[ltxfqdy rkzm]

rgchupj qmocsveih osbph eopbkjsva jclpko vfnwzlpe jhyvxu

[Compulsory Acquisition]

Thanks for sharing. Stuff like sompulsory acquisition is something to be taken seriously, that is why it is better if we ask for help from lawyers and experts.