By Maurie Cashman
Acquiring another business is a strategy that you can use successfully to grow the value of your business. It requires a sound strategy, discipline and an experienced team to identify, evaluate and complete a transaction that will add value.
A recent McKinsey study states â€œAcquisitions succeed because of many factors, but they generally tend to have a clear strategic argument for themâ€¦ such as improving the performance of the target company or taking over a company to get skills and technology more easilyâ€.
In January we closed a transaction that represents a good example of an effective strategy of growth through acquisition. Dan & Jerryâ€™s Greenhouse of Monticello moved from the 45th largest commercial greenhouse operation in the United Stated to the 35th spot by acquiring DeJong Greenhouses, Inc. in Pella Iowa. We represented DeJong Greenhouses in this transaction so we donâ€™t know what the strategic reasoning was for Dan & Jerryâ€™s to make this transaction, but there are usually common motivations for companies that make an acquisition within their industries.
Work on your business instead of in your business.
As owners grow and mature in their businesses they often reach a point where they have the capability to manage much more than their business encompasses. The business has succeeded over a significant period of time and a solid management team has been built under the ownership. Perhaps a son or daughter is ready to join the business and a larger base is needed to support more families. Ownership is ready to hand off the day to day operations to the management team and transition to higher level business management.
An acquisition in this case allows a business to leverage an existing management team over a significantly larger revenue base, making the overall business much more cost-efficient. Therefore, ownership is able to shift focus to strategic planning, financial management, talent development, succession planning and transition management.
Acquire New Customer Relationships
Businesses that seek acquisitions to build value are often looking for strategic customer relationships. Often the acquirer has a set of strong customer relationships already and the target company has unique relationships which do not overlap. In some cases, a business may be developing some customer concentration, creating risk. By acquiring another company that also has some concentration, but with a different set of customers, they are able to reduce the impact of any one customer to the overall business. This reduces risk for the resulting company.
It is very difficult for a business to expand into new territories. Expansion requires them to compete head to head with an existing competitor who is well-established and may have cost advantages. It is often more cost effective to acquire an existing competitor with operations already established in an area that the acquirer wishes to do business.
Similar to acquiring geography, acquiring facilities can be risky and expensive. Building new facilities may be cost prohibitive and requires dealing with state and local permitting and regulations. A company with good facilities can be an attractive target for a company wishing to expand its production capacity.
Acquire a Management Team
A significant acquisition will tax most management and ownership teams. Your company may have a management team with a certain skill set that can be enhanced by the addition of a team with complementary skills. For example, you may target a company that has successfully implemented a new production process that you have no experience with to go along with your strength in sales and customer support.
Increase Your Companyâ€™s Attractiveness
If you are considering selling your business at some future date you may want to consider a strategic acquisition. There are different buyers for different sizes of businesses. Larger entities typically want to look at larger transactions that can â€œmove the needleâ€. By increasing both the scale and the scope of your business you may attract a larger and stronger suitor for your eventual sale.
A strategic acquisition can add considerable value to both the acquiring company and the acquired if it is carefully planned for and executed. You may want to consider it as you consider how to increase the value of your business.
Â© 2017 Aspen Grove Investments, Inc.