Small business acquisitions have become a vital part of growth strategies for many companies. I’ve been reading about many great, publicly traded service companies –many of whom buy dozens to hundreds of small businesses annually. They jump-start expansion plans occasionally or fit into a regular plan. In this post, we’ll delve into the key factors to consider: the type, distance, pace and size of acquisitions.
The first decision to make when considering a small business acquisition is the type. Are you expanding an existing business line or entering a new line?
- Expansion of Existing – Many small businesses are limited by the geography they service. In this type of acquisition, you purchase assets of the target business in a new geography, gaining customers, staff and equipment in the new territory but with similar customers, products, and services as your original business line. While this is not easy, I believe it is the wisest first step.
- Enter New Business Line – Many small businesses do not want to continue to reinvest in their existing business line. They have found a local maximum and rather than expand geographically they prefer to diversify. In this type, you purchase assets of a new business and expand your offerings. This could be total diversified or vertical or horizontal integration plays –going forward, backward or horizontal –or completely divergent. For smart creatives with spare time, this is the most fun.
The geographical location of the target business plays a significant role in small business acquisitions. Consider the following factors related to distance:
- Local or Remote – Are you looking to acquire a business in your local community, or are you open to remote acquisitions? Will you move? Local acquisitions may allow for easier management, while remote ones can provide access to new markets or broaden your search. We started local and are grateful we did.
- Market Access – Evaluate how the location impacts your access to the target market, distribution networks, and supply chains. Sometimes, a strategic acquisition in a different region can open up exciting new opportunities. I would be very cautious of pouring money into new business lines in new geographies. Taking an existing business line into new geographies makes sense.
The pace of your small business acquisition is essential, as it can influence the timeline of everything else. Key considerations include:
- Quick or Gradual – Determine if you want to acquire rapidly or if you want a more slower more lumpy pace. A quicker pace might be necessary if you want to capitalize on a market opportunity or you intend to perform multiple acquisitions. However, a very gradual program may be warranted if you will do a few, larger deals only occasionally. We started quick, backed way off, and have recently resumed what we think will be a sustainable pace for us. Find your own pace.
- Due Diligence – The pace at which you proceed should align with the thoroughness of your due diligence. Faster acquisitions may involve more risk of loss but secure better terms on occasion. A slower pace may allow for deeper investigation. Of course, if you pace yourself very slowly and have less experience, you may fall in love with the wrong deal. We have found that over confidence hurts us wherever we go. Pick the pace that works for you and try to stay within your sweet spot.
The size of the small business acquisition is a critical factor that can determine the level of resources required and impact on your existing operations.
- Small vs Large: Smaller acquisitions may be less capital-intensive and less complex to integrate. However, they still require management time. Spending your time on larger acquisitions can offer greater growth potential but require more cash, debt or both. Recall that management challenges usually grow exponentially with additional people involved. We have found ourselves able to provide a great experience to small business owners. We didn’t mesh well culturally with larger deals we went after. Maybe this changes with your bankroll, but we are happy to do small deals that others pass over.
- Synergy: How well will the target company complement your existing operation? A well-aligned purchase can save you money and produce faster growth. I usually hate the word “synergy” because it usually is overstated. However, eliminating overhead expenses or taking you into new markets faster can bring about production gains faster than organic growth strategies. Buy your way into the market. We typically prefer to make strategic acquisitions small and strategic expenditures post-entry greater than competitors.
In conclusion, the success of a small business acquisition strategy depends on your ability to assess and navigate the type, distance, pace and size of deals. Each decision can significantly impact the outcome. Therefore, it’s crucial to develop a well-thought-out strategy. When small business acquisitions are executed wisely they can provide right sized stepping stones to achieving your entrepreneurial dreams. They can also take you into a nightmare if the stones are too far apart or improperly sized. Be careful out there.