Critics who mocked the Huffington Post recently admitted they were wrong when AOL bought Arianna Huffington’s startup for a cool $315 million. Media experts agreed it was a smart acquisition that would benefit both companies.
However, you don’t have to be a big player like AOL to achieve a lucrative move like that. With a smart strategy, small- and medium-sized businesses can also gain competitive advantages by acquiring another company. At the same time, purchasing another company is a huge endeavor and not every business should do it.
Here’s what to ask yourself to find out if an acquisition makes sense:
Is it a good fit?
When looking for a seller, look at companies that complement yours. “A good fit between a buyer and seller typically happens when they are in the same industry or a parallel industry; they share customers and the deal will bring additional market share,” says Pat Fister of Fister and Associates investment advisory services, in an article in the St. Louis Commerce magazine.
What will the other company bring?
Determine which companies can offer something that you need. AOL has a lot of content, but it needs a larger audience to help it distribute it, which is where the Huffington Post comes in. Besides new customers, access to more sophisticated technology, greater cash flow, and other advantages that will fuel growth and beat your competition are factors to look for.
How will it affect your customers?
You should always consider any major business move from the perspective of your customer, writes Steve Rutan in the blog, Simplified Strategic Planning. Rutan uses Tim Hortons and Cold Stone as an example. Hortons’ morning-oriented coffee and baked goods business was a good fit with Cold Stone Creamery’s ice cream, which is more popular with customers in the afternoon and evening. “The common emphasis of both brands on freshness (Hortons’ 20-minute freshness guarantee on their coffee combined with Cold Stone’s ice cream made on the premises) worked together rather than created conflict in the eyes of their respective core customers,” writes Rutan. Ask yourself if the acquisition will enhance the customer experience or detract from it.
Are there any problems?
Find out what the company’s weaknesses are and whether the problem is an external cause, such as a weak economy, or if it’s an internal issue. Also, research the area where the company is located. If you own a high-end restaurant, for example, and are thinking of opening another one on the other side of town, it would not do you any good if most of the residents have been cutting back on expenses or are college students (read: temporary and poor).
What are the major differences?
If you’ve already approached the seller, find a way for both companies to try working together to determine whether the marriage should happen at all. “Testing out the concept of the combined companies can provide remarkable ‘acquisition insurance’ against making a bad decision,” writes Rutan. When doing a test, look for critical differences, such as different accounting or sales procedures, that may undermine the company’s success.