Expansion is important to a business and it can happen organically, especially with good services or products. However, what if you need to expand or need to evolve in a certain amount of time to remain competitive? For small businesses, this scenario doesn’t happen often but it does happen. A lot of companies hurt themselves by not considering the path of least resistance, which is to acquire a company instead of expanding their own.
When anything is done in a rush, you are bound to miss key functional activities. You also exhaust your financial resources and in some cases, your capacity of engagement. Many companies have done this only to find that a year or two later, they are facing layoffs. However, I want to suggest that companies that need to grow their business or create new additions to their offering should consider purchasing existing companies that are doing well in their respective industries. This is not new, in fact, major companies like Google, Facebook, L’Oréal and even Spotify have done this. Instead of competing with companies or trying to reinvent the wheel, they just buy them.
Consider L’Oréal, they are a major beauty retailor that boasts over 100 brands and specifically 39 beauty brands. However, there have been some markets and products that they could have created to compete with the market but the financial cost to do that was significant. So, to reduce cost and competition, they purchased the very companies they could have competed with.
With podcasting blowing up, streaming platforms are looking to cash in. Well, Spotify – which has over 113 million subscribers and 248 million monthly active users – decided to purchase Gimlet Media in 2019. By purchasing the premiere podcasting company, Spotify was able to squash their competition, have quality employees who knew the industry, and acquired content that had a substantial audience following.
So if you ever need to advance your business through acquisition, consider these three factors:
Financials & Assets – The right company may not be the best company. Purchasing a company involves being meticulous. It is like getting married. Once you two make it official, all your debts and obligations become each other’s. The biggest evaluation is based on how the company is running financially. If the numbers are not where they are supposed to be, they will prevent your expansion by becoming a liability. So have an accountant review their financial documents.
Company Culture & Synergy – Companies that merge need to share the same mission and approach. Obviously there is room to learn from each other and innovate but, at the core, fundamental principles should be the same. An acquisition must increase the quality of life or maintain it for employees. The reason being that as companies merge, employees will need to work together. If the behaviors and standards are different, it may cause employee turnover that, in the end, will hurt the business. It is the employees that drive the performance of the company. If there are different approaches to attire, policy, and even pay discrepancy, the companies must first consider a new way to engage each other. Companies that have faced this issue have dedicated months to this process. The question is, do you have the time to do that without ruining your expansion?
Consumers – Finally, how does this effect your consumers? An acquisition can mean added benefits for your customers. However, if the acquisition means added cost or changes in features, are you isolating your new or current market? It is vital to know how this acquisition will affect your churn rate. Churn rate is the rate at which a customer stops subscribing to a service. If the number is high then technically you are not expanding your company; you are reducing your company. But if the number is low and it means more customers for you, then it makes sense to do it. The best way to reduce the churn rate is to inform the customers early of this acquisition and reinforce to them that you are doing this in their best interest. When you do that, you gain your customers buy-in and they will likely be more patient as your company navigates your merger.
Acquisitions happen ALL the time, but they have mostly been seen as a strategy for big companies. Yet, this is a great way to increase resources, market share, and eventually revenue for all businesses. If you decide to pursue this route, I implore you to engage a specialist, lawyer, and/or a business broker that specializes in this field. However, even with their expertise, make sure this decision feels right to you. Good luck!