Mergers and acquisitions (M&A) are the takeover process that involves buying another company and integrating it into the buyer’s business. In most cases, nothing is left of the company you bought. A merger is a more relaxed option, which is to combine businesses.
Here I would like to draw your attention to one of the varieties of such processes, which often remains without due attention. It is the participation as a buyer of a small and medium-sized business. Usually, when it comes to M&A, we mean deals in which large companies are involved. This type of activity is widely reported by news agencies, attracts the attention of shareholders, etc. However, buying companies can be a key element of a small and medium business growth strategy. Of course, a small bakery is unlikely to buy a huge corporation; rather, a large corporation will buy a promising startup. However, small and medium-sized businesses may well absorb an equally-sized company.
Owners’ Myopia
So why don’t business owners of small and medium-sized businesses see M&A deals as an important part of their growth strategy?
- Many CEOs are unaware that there is an M&A growth strategy at all. They continue to grow at a standard rate through sales. Moreover, some managers believe that the strategy of growth through sales and hard work is correct, while other techniques are a trick. The circle of such leaders often includes novice businessmen. They have just started their business, the company has made the first profit and, being in the “flight”, they enjoy. At the same time, they do not consider it necessary to buy someone’s business. They do not understand why they should do it, if everything is going just fine!
- Even if the business owners are aware of the M&A growth strategy, they also know about the banking services that supports such types of transactions which they consider unreasonably expensive. The owner doesn’t want to invest in a company that he has to pay a lot for. He decides to just invest this money in his business.
Reasons to Reconsider
Nevertheless, of the conventional wisdoms described above, there are several benefits to a business venturing into the takeover and merger activity.
Marketing advantages
Choosing to grow through sales you can face a number of difficult to overcome difficulties. Experienced leaders know this. The process of attracting new customers has a saturation point, after which the efforts of the marketing team can resemble Sisyphean labor. In this case, buying a business with a ready-made customer base is a simple and logical move forward. If the merger process is fine-tuned, then the business will get new customers who are already loyal. For example, those who are familiar with service standards and who have long been regular customers. Thus, it is possible to significantly increase the customer base and at the same time not to waste time, effort, and money doing it in the usual traditional way.
Financial advantages
All companies make forecasts of their development. Even a small company, for example, a bakery, thinks about how many customers will come to them tomorrow, how many in a year. Naturally, business owners base their vision of how they will develop further on these assumptions. So buying another company is very beneficial in the sense that the leader can see the development of a competitor in a historical context and extract useful data from this to model his own company’s growth. Using historical rather than forecast data is always a more successful approach to formulating a company’s strategy.
Moreover, no less important financial aspect is the flexible role of the buyer in transactions. The business owner does not have to go to the bank for a loan. You can always negotiate the terms of the deal with the seller. For example, it is possible to agree on the procedure for repaying debt at a rate that is convenient for everyone, distributed over time. Furthermore, the seller may be involved in financing the new company or have some other financial role in the transaction.
Competition advantages
Buying a competitor will always lead to an increase in market share. If the owner of a cafe buys a nearby catering facility, then in this street he will own a larger share of the market. Even if he sells burgers and has now bought a café selling cheesecakes it means that he has mastered a new segment. It is also obvious that there always is one less competitor on this very street.
So don’t be scared by the great and powerful M&A industry. Just consider it as a real and viable option in your growth strategy.
