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Acquisition Strategy: A Definitive Guide

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Published: July 30, 2021

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Acquiring a new business is a great way for companies to grow and succeed. It can also help them generate new products and diversify their customer base. However, if you’re hoping to make an acquisition, it’s important to develop a strategy for the merger and use tactics that ensure your company is meeting its goals. In this guide, we’ll cover the basics of acquisition strategies and teach you how to develop your own.

What Is an Acquisition Strategy?

Person writing on a piece of paper.

Image via Unsplash by Scott Graham

An acquisition strategy is a plan that companies use when purchasing other businesses. When a company purchases or obtains another business, it’s called an acquisition. During an acquisition, it’s important for businesses to have a strategy or plan in place so the transition of power goes smoothly. An effective strategy helps minimize mistakes and maximize income while these changes occur. 

Why Do Companies Make Acquisitions?

Acquisitions can be very helpful to companies for several reasons, including:

  • Decreasing competition: When a company experiences competition, it might be advantageous to buy the competing businesses and eliminate them from the market.
  • Entering a foreign market: If a company is trying to sell its products in a foreign country, acquisitions can help. By purchasing another company that’s already in the foreign country, the company can break into the market more easily.
  • Growing the company: If a company wants to sell new products or enter new markets, acquiring other companies is a great way to do that.

Companies aren’t the only entities who make acquisitions. Financiers and other individuals sometimes buy companies with the hopes of improving them and selling them for more money once they increase the overall value.

When Do You Need an Acquisition Strategy?

Unless you’re currently in the market to buy a new business, you don’t need an acquisition strategy right now—and developing one without a business in mind wouldn’t give you much of an advantage. For the most part, acquisition strategies are built around the specific company you want to buy. For example, you would use a different acquisition strategy for a small shoe company than you would for a large investment firm.

If you are hoping to buy a business, it’s good to start preparing your acquisition strategy as soon as you can. In fact, your strategy can even help you determine the benefits and drawbacks of completing the acquisition. 

Additionally, whether you’re trying to convince yourself or a board of directors, creating a strategy can help you present the acquisition proposal more effectively. A formal strategy displays information about the current market and the company’s current operations and finances. This helps demonstrate how expensive the acquisition will be, both in terms of purchasing price and future expenses. It also shows how the acquisition can benefit the company in the long term.

How To Build an Acquisition Strategy

When building an acquisition strategy, it’s important to analyze different areas of the company in question. A thorough look at the business can help you find any red flags you need to consider closely. It also can help you identify areas for improvement within the company. 

Here is a list of steps you can follow to build an effective acquisition strategy:

1. Figure Out the Company’s Value

Figuring out the company’s actual value requires calculating its assets, such as inventory, employees, factories, stores, and more. Even if the company isn’t currently succeeding, its assets still have a set value. 

In the final price that you negotiate for the company, you can take into account its current problems or expenses you’d be inheriting, but that comes later. For now, examine the company for its face value, and look closely. Are any of its assets damaged? Are they outdated? Make sure you know everything’s true worth, because these are things you’ll want to use or sell after you acquire them.

2. Determine the Current Market

Next, it’s important to know the current market the business operates in. If it operates in your industry, you won’t have to do a lot of research, but there are still few things to consider, including:

  • Number of current customers: Customers are part of the company’s assets. If the company has a lot of customers shopping at its stores or using its services, this could potentially grow your own customer base. If the company doesn’t have very many customers, that’s also important to know. This means that you may need to invest extra funds in marketing and rebranding. 
  • Customer loyalty: Just because a company has a lot of customers doesn’t mean you’ll automatically earn their business. For example, let’s say you buy a small family-owned company. It’s possible that the customers are more loyal to the family than to the company’s products or services. If that’s the case, it will also take you some time and money to generate that loyalty yourself.
  • Untapped potential: It’s possible that the company you want to purchase might be limiting itself. That means there might be a market it hasn’t explored yet—perhaps even a market you have experience with. If you see untapped potential in a company acquisition, that might increase its value to you and your business.

3. Examine the Company’s Departments

It’s important to understand how the company’s departments function, especially their sales and marketing departments. It’s possible that the company might have a few marketing campaigns in place that you’ve never tried before. Maybe it knows how to effectively remarket its website, or maybe it has a strong emailing system set up. It’s also possible that it prices its products a little differently than your company does. If so, it’s worthwhile to examine if the difference in pricing was helpful or hurtful to the company’s revenue. 

You can also use the company you’re acquiring to learn more about your industry. In finding areas where you can improve the company, this may create comparisons that help you advance your own business. Keeping track of these factors can help you develop your business and the acquired business simultaneously.

4. Analyze Finances and Projections

This step of the acquisition strategy is one of the most important. It provides you with crucial information on the company’s performance over the years and helps you determine if the company is still salvageable. When you look over the finances, go back at least three years. As you assess how the company developed during that time, you can understand where it made good and bad decisions. If you analyze it further, you can also see the company’s future financial projections.

Together, all of this information can help you and other executives make an informed decision about buying the company. For example, if you notice the company is projected to perform worse financially over the next few years, you’d need to determine how much of your own company’s resources you’d need to allocate to make sure that doesn’t happen. 

5. Develop a Transition Plan

When you purchase a company, it’s good to know how to transfer power from one person or entity to the next. It’s also good to understand how you’re going to incorporate the current company’s workflow into your own. This includes ensuring that the acquired company’s employees, projects, and equipment will be used efficiently. It’s also important to make sure that the legal transition of the company’s current contracts and intellectual property is handled with care.

6. Provide Evidence

As you research the company and develop your acquisition strategy, it’s helpful to provide evidence that supports your final decision. It’s easy to play an estimation game, but with company acquisitions, the more supporting documents you have, the better. Whether you’re making the decision yourself or convincing company executives, you need to demonstrate that acquiring a new business is a sound idea. You want to be able to present the information to an investor or board of directors and say, “I want to purchase this company, and after seeing all the information, you’ll want to as well.”

Some helpful evidence to procure includes:

  • Tax returns
  • Sales contracts
  • Auditing letters
  • Licenses
  • Finance reports

Types of Acquisition Tactics

Next to building your own strategy, there are some common acquisition tactics that companies might use in specific situations. Most often, professionals rely on these tactics when a beneficial opportunity presents itself. However, they’re also used to help companies fulfill certain goals and objectives. These tactics include:

Sales Growth Strategy

Sales growth strategy is when a company buys a business in order to help it grow and develop. It’s one of the most common reasons that a company might buy another business. Sometimes, it’s difficult to grow a business organically because it faces a lot of challenges, which can slow its progress and development. Acquiring businesses in the same industry can help them grow more quickly and easily.

Vertical Integration Strategy

Vertical integration strategy is when a company buys businesses so it has complete control over its merchandise. This can include purchasing the vendors, distributors, and retail locations. For example, a large fast food chain might buy their meat vendor to cut down on overall inventory and supply costs.

Diversification Strategy

Diversification strategy involves a company selling products or services in an industry outside of its own. Companies might pursue a diversification tactic for several reasons. Some might want to develop their company further by expanding it into different markets. Other companies might be worried about how they’re performing in their own markets and want to find a way to save or increase their revenue through new products.

Adjacent Industry Strategy

This strategy involves buying into an adjacent industry in order to further utilize your company’s strengths. An adjacent industry is a market that’s similar to the one you currently operate in. For example, reupholstering airplane seats could be considered an adjacent industry to reupholstering furniture. 

Full Service Strategy

Full service strategy is when a company buys another business in order to offer its customers full service in the industry or market. For example, a beauty company may wish to expand in order to provide wellness and lifestyle items based on trends that indicate that consumers see these all products as interrelated. To do this, the beauty company may investigate wellness and lifestyle brands that it may acquire in order to integrate these products into its own offerings.

Geographic Growth Strategy

Geographic growth strategy is when a company expands its business to new areas. However, the company might not have enough resources available to perform its duties in the new location. These resources can include warehouses, offices, and sales staff. If the company wants to expand, it might acquire another business in a new area that already has all of those resources set-up and ready to go.

Industry Roll-Up Strategy

The industry roll-up strategy is when a company buys some smaller businesses and combines them into one large business. Merging the businesses together can help the company combine resources and reduce overall costs. Most often, the company tries to buy businesses within the same industry. This can help merge the businesses more efficiently. However, the industry roll-up strategy may require extra effort because it requires merging several different brands, administrations, and products.

Synergy Strategy

The synergy strategy is when two businesses merge to create one large company. Though similar to the industry roll-up strategy, synergy focuses on filling gaps in production or distribution. That means when both companies merge together, they use their combined skills and knowledge to create a more efficient business. Synergy strategy can also help reduce overhead costs and increase profits because it uses resources from both businesses.

Low-Cost Strategy

Low-cost strategy is when a company acquires several businesses with the hopes of increasing its sales volume. With a high enough sales volume, the company can then offer some of its products for an incredibly low price. The low price combined with the large sales volume often maintains an effective revenue stream that competitors can’t match. When they look for acquisition opportunities, companies often search for businesses that have a lot of customers and products that could be manufactured and sold at a low cost.

Market Window Strategy

A market window strategy is when a company buys a business with the hopes of taking advantage of a market opening. Essentially, a company might see that a new product could sell well, but it doesn’t have time to develop its own. Instead it buys a business that has the product and its distribution ready to go. The company is able to benefit from the current market window without wasting time developing new products from scratch.

Though these tactics and tips can be a helpful place to start, it’s still important to thoroughly understand a business’s major strengths and weaknesses before acquiring it. That understanding can help you create a robust strategy, which can help you determine the benefits and costs of the potential acquisition.

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