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Acquisition Myths BUSTED – the top 3 myths why companies don’t do M&A

by on June 25, 2013
50%_100%

Quantum Growth

The traditional wisdom for growing your business is quite simple – the way to expand your business is through hard work. You keep your customers happy and market aggressively. In the end it comes down to old fashioned sales and marketing, and plenty of hard work.

I argue that there is another way, contrary to this traditional wisdom.  A short cut to growth — Growth through acquisition.  Too often considered the exclusive domain of the largest of companies, it is also quite appropriate for the small and midsize technology company looking to achieve rapid expansion.

Myths Busted

Myth #1 – Growth through Acquisition is riskier than Traditional Growth methods

Not only are the risks associated with an acquisition not only smaller but are also far easier to anticipate and quantify than are the risks associated with traditional organic growth. For one thing the expenses of an acquisition can be projected with reasonable accuracy. The expenses associated with more traditional growth strategies are far less predictable when measured against a clear objective. For example suppose you’re running a $10 million company and want to grow by 50% in one year. Suppose also, there is a $5 million company for sale for $2 million. Your 50% growth will cost $2 million. Under this scenario, your likelihood of achieving your 50% growth goal is very near 100%.

You could also decide instead on a more traditional method of achieving 50% growth such as increasing marketing, offering more promotions, or hiring more sales staff.  How much will it cost? How long will it take to grow 50%? How likely is it that the forecasted expenditure will achieve the that 50% growth goal?

My point: an acquisition strategy may well be cheaper, is probably quicker, and is certainly less risky in terms of meeting the stated objective at the anticipated cost.

Myth #2 – It’s Easier to Finance Organic Growth than Acquisition

Even if a confident entrepreneur insists that organic growth is better than growth through acquisition, he’s likely to hit a brick wall in financing his ambitious expansion. Bankers, even VCs, will take a dim view of business plans projecting quick growth of say 60% to 80% or more. They will tell you you’re being unrealistic and you don’t understand the dangers of too-rapid growth.  Getting the banker or VC to agree to finance your growth plans that has been determined to be too ambitious and too risky will be extremely difficult.

In an acquisition, forecasting growth is easy and wins  hands down over organic growth. Companies regularly acquire their way to 50%, 100% and even higher growth rates overnight through acquisitions. The warnings of too-rapid growth just don’t apply because the systems to handle the growth are in place in the form of the business you’re about to buy.  Sure, they may need some tweaking and changing to fit in with your own procedures, but chances are they are serviceable for a period of time and that the adjustment will be relatively easy to achieve, at least relative to rapid growth by more traditional methods.

How about financing inorganic growth plans?  As for financing, the argument in favor of acquisitions gets even more compelling. Not only do bankers and VCs accept growth through acquisition, they prefer it to even modest traditional growth. Whether it’s to obtain a loan, raise equity capital, or if you’re buying the target company with stock, financial types are taught to make projections based on past financial performance as demonstrated through financial statements. They pay lip service to business plans but they want to see forecasts based on past performance from which they can draw conclusions regarding cash flow. When you buy a company you can show them what they want to see in their own language — the financial statements of the selling company.

Myth #3 – M&A is Only for Large Companies

Somehow, CEOs of smaller businesses assume that merger and acquisitions is a Wall Street game that can’t be done by smaller, especially private, businesses. Some of the mechanics are different (for example, there can be no hostile takeovers of privately held companies), and your acquisition probably won’t be reported by CNBC. But the rationale is just as compelling and the benefits are just as real for a small privately held company as for a large publicly held firm.

Conclusion

A short cut to growth — Growth through acquisition.  Too often considered the exclusive domain of the largest of companies, it is also quite appropriate for the small and midsize technology company looking to achieve rapid expansion.The risk is smaller, and the financing is easier. Finding the right company to acquire takes some effort.  I’ll address that issue in a future post.

p.s.

If you’re wondering how you build a company that you can sell for a premium in a few years, contact me to discuss the Valuation Amplification Process.

I also invite you to download the white paper and learn the 5 step process on How to Quickly Increase Your Valuation: a Proven 5 Step Process.  http://www.therevenuegroup.net/free-offer.html

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From → M&A, Strategy, Valuation

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