Growing through acquisition
Wednesday, September 26, 2007/
While acquisition is an effective tool for growth, a lot of SMEs don’t really understand its value.
If you want to expand your company quickly, then acquisition is probably the fastest way to get there. Done well, it provides instant increases in revenue, customer base, staff and capacity – and depending on the target, geographic spread.
The combined entity may also be worth more for every dollar earned. With so much going for it, and with businesses for sale at historically low prices, it is perhaps surprising that more companies are not choosing this option.
There are a number of possible reasons for this. First, despite the increasing number of businesses being listed for sale they still represent only a fraction of businesses available for purchase. As one business commentator mused: “Every business is for sale, it is simply a matter of price.”
This is supported by research that found more than 80% of business owners would sell if the price was right, while less than 20% had any plans to actively sell the business.
This is because most business owners are under the misapprehension that someone will knock on their door, and if they do they will be in a better negotiating position. In fact neither of these things is true. But if you are looking to grow through acquisition, don’t be afraid to ask the question.
The second reason for the lack of acquisition activity is that many businesses believe they are unable to finance the deal. This is based largely on a lack of understanding of two key parts of the purchase process.
First, they over-estimate the cost of the business purchase; and second, they are unaware of the financing options available to them. A significant number of businesses are bought on a return on equity ratio greater than 30%, which provides plenty of scope to cover interest payments on a loan. As well as this, a considerable number of business sales are undertaken with payment schedules ranging from months to years.
The third reason for businesses avoiding this avenue for rapid growth is their lack of confidence in their ability to merge the target organisation into their own. There are certainly many challenges in this area, and just as many ways of meeting the challenges – all of which will be discussed next week.
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