by Armando Soto, Creator of Break 2 Success
A strategic acquisition can seem like a great option for a small business looking to grow. Established businesses have already built a customer base, revenue streams, and operational infrastructures. By acquiring one, small business leaders can skip many of the most challenging steps needed to make a business profitable.
But acquisitions are not something to rush into. While they can save business leaders a lot of work, they also carry significant risks. The right acquisition creates true value while aligning with the company’s overall vision.
Assessing the pros and cons of strategic acquisitions.
Acquisitions can be one of the fastest and most effective ways to scale a business. They rapidly expand market share, allowing companies to outpace competitors that rely on organic growth. They also enable companies to reduce market risk through diversification and break into new markets more easily.
Through acquisition, companies can also quickly access new tools and gain new talent and expertise through the acquired company’s skilled employees and specialized knowledge. They can also acquire technology and other assets, such as facilities and intellectual property, to amplify their overall business efforts.
Financial risk is one of the chief downsides to acquisitions. Accurately valuing a business is a complex process that small business leaders typically have little experience with. If a company overpays for an acquisition, it can lead to financial strain. In addition, cash flow problems can be a factor when companies take on excessive debt to acquire a business.
Acquisitions can also pose an integration risk for companies. Business systems, process, and technology need to be integrated, which can lead to operational disruptions if not expertly handled. Bringing two companies together can also lead to cultural clashes, which can sink morale and trigger a decline in engagement and productivity.
To make sure an acquisition offers more advantages than disadvantages, companies must be very careful with due diligence. It is easy for business owners to get caught up in the excitement of the deal and overlook or ignore problems. To avoid expensive missteps, companies must ensure acquisitions will work in real-world execution and not just on paper.
Including acquisitions in a broader growth strategy.
Acquisitions should always be part of a broader business growth strategy. Many companies make the mistake of focusing solely on acquisitions without improving their internal systems, which leads to inefficiencies. While acquiring a company can provide immediate scalability, businesses still need to strengthen internal operations, sales, marketing, and leadership to sustain long-term success.
Shifting resources away from a company’s core operations can also be risky because acquisitions take time. Companies must accept a pace that adequately allows for a comprehensive investigation of the target company’s financials, legal history, and operational structure. A rushed acquisition can lead to costly mistakes, such as failing to identify pending lawsuits, tax debts, or outdated systems.
Assessing a company’s readiness
Before pursuing an acquisition, businesses must take steps to ensure their own financials, cash flow, and leadership structure are strong enough to manage the process. Guidance from M&A attorneys and accountants can help to identify hidden liabilities and tax implications that can damage the deal.
Businesses must also prepare their internal teams for the changes an acquisition will bring. Poor integration is one of the biggest reasons acquisitions fail. Leaders must play a key role in this process by providing clear and consistent communication that anticipates and addresses their employees’ concerns.
Many companies engage with acquisition advisors in the early phases of the process to guide the process and ensure common pitfalls are avoided. Having an experienced advisor to quarterback the entire process ensures companies can identify the right opportunities, negotiate favorable terms, and integrate the acquisition seamlessly to maximize return on investment.
Assessing the success of an acquisition.
Once an acquisition is finalized, a company should begin tracking key metrics to determine if its strategy has been successful. If expected performance isn’t achieved, companies must find out why and make changes to drive improvement.
The best way to measure success is through financial performance, operational efficiency, and strategic alignment. Did the acquisition increase revenue and profitability? Has it improved operations rather than created bottlenecks? Does the leadership team feel that the deal has strengthened the business? Many companies don’t track the right metrics post-acquisition, leading to unclear results.
Changing the pace or depth of integration may be necessary to optimize post-acquisition performance. Refining operational processes to identify and eliminate redundancies can also help improve performance. In some cases, improving communication is all that is needed to improve the integration process and increase profitability.
Strategic acquisitions can catapult a company to new levels of growth and success, provided they are properly navigated. To maximize the return on investment, companies must identify the right opportunities, negotiate favorable terms, and integrate the acquisition seamlessly. Long-term success flows from a strategy that considers and addresses all phases of the process, from exploration to execution.
Armando Soto, President of Break 2 Success, is an entrepreneur, business advisor, and investor with over 15 years of experience guiding CEOs through business growth, scaling strategies, and turning around struggling companies. He helps CEOs and business leaders align their personal growth with their business strategy, creating a legacy of success, wealth, and fulfillment.