Some businesses are eager to grow, and to do so, they acquire competitors. An acquisition is a good way for a company to improve its market share, expand operations and gain new resources over a short period. There are pluses and minuses to this practice, and entrepreneurs should analyze the benefits and challenges in advance.
Here we’ve listed the pros and cons of acquiring another business that every founder should consider before signing a deal.
Pros of Acquiring a Competitor
Entry to a New Market
Acquisitions can prove effective when entering new markets, but you have to prepare the long-term plans, framework conditions and milestones to ensure that the products get to market faster. An acquisition can help you overcome market entry barriers and access an existing client base.
Better Branding Opportunities
You can run a joint promotion, share advertising and combine purchases to stimulate customers’ interests in your shared industry. This strategy works well for retail or consumer goods and tech products and services.
Increase Your Customer Base
You can add your competitor’s existing customer or client base to your own through acquisition, but make sure you streamline their operations and integrate them into your company. Acquiring competitors can also broaden your target audience by tapping new demographics that expand your company’s reach.
Boost Market Share
An acquisition can help you increase the market share of your company quickly. Growth through acquisition can help you gain a competitive edge in the marketplace and achieve market synergies.
Bring in New Competencies and Resources
Taking over other businesses can provide you with many benefits, such as acquiring new competencies and resources, rapid growth in revenue, access to R&D platforms and better equipment. Acquisition usually involves a complete buyout of the business, including its assets, manufacturing machines and workforce.
Improve Financial Gain
If your competitor operates in a different market or provides unique products or services, you can increase your revenue by acquiring it. The acquisition can also help you improve the long-term financial position of the company, which makes raising capital for growth strategies easier. You can also increase revenue by selling any assets of the acquired company which you don’t need.
| Talk to us about how outsourced business services can ready you for an acquisition. |
Fresh Ideas and Perspectives
When a company acquires another organization, it also gains the efficiencies and experience of that company’s employees, which allows the business to benefit from their core competencies. Acquisition often helps you put together a new team of experts with fresh perspectives and ideas.
Minimize Production Costs
If you acquire a business that sells similar products, you can create economies of scale, which means lowering production costs. Thus, the risks and costs of new product development and competitive reactions decrease.
Taking over another business results in operational expansion for the buyer. This may include manufacturing plants, marketing channels, an experienced workforce or suitably located business premises.
Now, Check the Cons
While an acquisition can create substantial and rapid growth for a company, it can also bring some issues along the way, such as the following.
May Increase Your Debts
Perform an accurate cost and expenditure analysis of another company to make sure you aren’t going to increase your debt load. Also, analyze balance sheets, accounts receivables and payables, as well as inventory. If a company has too many liabilities, it might not be worth acquiring.
Increase Overhead Costs
The costs of acquiring another company can be high and may lead to a loss. The returns from acquisitions may not be attractive, or assets may have a lower value than perceived.
Can Cause Clashes Between Culture and Values
The clash between the different corporate cultures may create a problem in managing resources and competencies. The synergies of two companies may also not match, or the companies’ objectives may even conflict.
Brings Negative Attributes
By acquiring a firm, the buyer also purchases all potential negative attributes of a business. This can include incompetent staffers; a bad corporate image, product or customer service; lack of brand awareness; costly rental premises; underperforming production plants; unfavorable locations; and operational or management problems.
Want more?
Since 2006, Escalon has helped thousands of startups and established companies by optimizing their back-office functions including accounting, HR, payroll, insurance, and recruiting and taxes — and we can help yours too.
