However, while growth by acquisition provides many advantages, there are a few pitfalls to watch out for:
- Don’t pay over the value of the business. There are several ways a business can be valued, but ultimately as a buyer you should be focused on future profit, growth and cashflow and evaluating the potential in these areas to determine a fair price to pay.
- Make sure the value is transferrable, not just retained all in goodwill. Are the systems and processes that the business has been built on documented and able to be followed by someone new or is it all tied up in the knowledge and relationships of the previous owner? Does the business actually own the IP that you wish to acquire or is it licensed from a third party? Is the license transferrable?
- How sustainable is the business and will it continue to perform the way it has historically once you acquire it? Will customers and suppliers stay with you? How will they respond to change? What contracts are in place and are they enforceable after you take over?
- Are the staff loyal to the business or its previous owner? Who will you retain and how? What impact will change have on the team? What are their expectations? Is there a cultural fit between the two businesses and how will your staff take to working with new people? Are there influential individuals who can aid the settling in process?
- How will you structure the acquisition? Will you buy the business entity or just its assets? Buying the entity means you acquire its risks and liabilities such as debt, previous trading history, tax liabilities and responsibility for responding to customer action against faulty products or services. Will the warranties and indemnities of the business hold up against this? If not, buying the assets only might be a consideration as this generally carries less risk.
Growth by acquisition is a sound option to be considered and can reap faster results compared to the slower organic methods of growing a business.
However, you need to weigh up the pros and cons and determine if it’s the right strategy for you.
Marc Peskett is a Director of MPR Group, a Melbourne based firm that provides business advisory and finance lending services, as well as tax, outsourced accounting and grants strategies to fast growing small to medium enterprises. You can follow Marc on Twitter @mpeskett
