Entrepreneurs frequently say, “It’s a jungle out there. You either have to take business from others or have it taken from you.”
While competition can be fierce, there also are opportunities for win-win transactions. Indeed, most businesses either acquire other businesses or become acquired. The glamorous IPOs (initial public offerings), in which firms like Google raised over $1 billion for its own growth, are the exceptions rather than the rule.
How do you know whether to acquire another business? Alternatively, how can you make your business more attractive if you’d like someone to acquire it?
Here are the key drivers for acquisitions. In each case, the question becomes, “Is it more desirable for the business to buy another firm or build the assets itself?”
1) Gain desired technology.
Many high-tech acquisitions occur for this reason. Developing new technologies poses high risks. Often, large companies find it more cost-effective to acquire a business with valuable technology than to do the work themselves.
For example, Glaxo, an international pharmaceutical company, acquired Spectra Biomedical, which I co-founded. Glaxo sought Spectra’s unique insights into the genetic factors predisposing people to migraine headaches. These insights complemented Glaxo’s extensive drug development and marketing capabilities. Such capabilities would have been far too costly for Spectra to replicate where the expense of bringing a new drug to market often exceeds $100 million. Therefore, this acquisition created value for both businesses.
Technology-based acquisitions also can occur in low-tech businesses. For example, if you have a particularly well-honed system for delivering a service, it will have value for expansion in your field. A larger player may want to acquire you for your marketing or service delivery systems. Alternatively, you can acquire other firms and implement your proven ways to expand them.
2) Gain products.
Are there unique or patented products involved? Do they fill a gap in a business’ product line and fit with its distribution capabilities?
For example, Earth Grains acquired San Luis Sourdough to fill a need for an upscale array of bakery goods. Earth Grains had the distribution and the shelf space from its high-volume bread business. It needed the distinctive products San Luis Sourdough offered to boost margins and profits.
3) Gain customers.
Acquisitions also serve as entrees to customer bases. In situations where customer relationships reign supreme and take time to develop, an acquisition can open immediate opportunities for expanded sales of related products.
For example, Exact Software, a Dutch-based software firm, acquired Macola Technologies to gain access to Macola’s client base of 7,000 loyal customers in the U.S. Exact sold its complementary software integration system to that customer base much more easily than if it had started to build relationships from scratch.
4) Gain management.
This driving force explains why many small businesses are acquired. For example, entrepreneurial founders may have started and managed a business but didn’t develop willing and able managers to carry it forward. Consequently, someone with that expertise would need to take over.
On the other hand, strong management teams can acquire floundering businesses and give them new life. If you have talented people, you can target and purchase businesses larger than your own.
As you manage your business, build your distinctive assets. Then, you’ll be in the envious position of either acquiring other businesses or being acquired on favorable terms.
Copyright © 2018 Don Maruska