Break out of growth constraints
Tuesday, 23 October 2007
Last Updated: Wednesday, 24 October 2007
By Tom McKaskill
There are several good reasons to buy a business – even if you already have one.
If you are a high-growth enterprise then you will almost certainly be bumping up against some growth constraints. Few people appreciate just how difficult it is to maintain a double digit growth rate and, in fact, only a very small percentage of companies are able to do so. Those that do often use acquisitions to overcome capability and capacity roadblocks.
Imagine you have a business that has 100 staff and you are growing at 50% a year. That means that you will have another 125 employees in two years. If you experience a 20% attrition rate, you will be recruiting an additional 50 staff to replace those who have departed.
Couple this with additions to office or factory accommodation, telecommunications and IT infrastructure, and you can start to see the size of the task. The business today will look very different to the same business two years from now. With such a growth rate, major changes are likely to occur in organisational structure, reporting systems, location and product/markets interfaces every few years.
Just the task of recruiting that number of new employees and absorbing them into the ever-changing organisation is a challenge. When this is taken together with the search for new office accommodation, upgrading infrastrucrture and acquiring specialised equipment to support the growth, you can see just how mammoth the problem is.
Now add the problem of financing such growth and watch the banks scurry away as they recognise that you don’t have the asset base to guarantee the debt, and you can see why acquisitions suddenly take on an attractive dimension.
Acquiring already trained staff is a priority for any business that has difficulty finding knowledgeable, qualified or experienced staff. When you need to do that in significant numbers, buying a business that has a stable workforce that can be easily moved to supporting your marketplace certainly makes a lot of sense.
Acquiring finance to support such an acquisition can also be easier as the acquired firm may have assets or be generating sufficient free cash to support the borrowing. Alternatively, a share swap may be used to acquire the business in a situation where new external capital may be difficult to raise.
If you are fortunate to be generating excess demand then acquiring capacity to service that demand may be a very smart growth strategy. Buying a firm that has under-utilised plant or has ready access to additional capacity, can allow the acquirer to take on major growth spurts without the pain of having to build out the capacity themselves.
Such a move might also be relatively easy to finance, especially if the added capacity can quickly generate additional cash to service the new debt.
Acquisitions are also frequently used to access new technology, acquire specialised expertise, enter new markets or secure key customer or supplier relationships.
While acquisitions come with their own challenges, perhaps the key here is to be very clear what contribution the acquired business is making to the overall growth strategy and to ensure that the evaluation and subsequent management of the acquired people and resources keeps the investment objectives firmly in focus.
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