Run a small business long enough, and at some point an opportunity to buy another company is likely to arise. If the acquisition is a strategic move, like the recent merger between Peet’s and Stumptown Coffee Roasters, it can be an efficient and effective way to accelerate growth and bolster the bottom line.
“If you can devote the time and money to an acquisition that fits into your business strategies and goals, then it can be an excellent way to take your small business to the next level,” says Jonathan Aspatore, CEO of ExecRank, a marketplace connecting small businesses with advisors and board members.
“A merging of companies can quickly raise revenues, help scale up your business and allow you to grow faster,” agrees Adam von Gootkin, co-founder of Onyx Spirits Company and author of Living Proof: Onyx Moonshine’s Journey to Revive the American Spirit. “Acquiring a business can also dramatically affect your company focus and have unintended consequences, so it’s a good idea to analyze the potential merger before making any moves.”
Not every merger is made in heaven. Though buying a business in your industry may seem like a no brainer, there are many things to consider before making an offer.
How Healthy is the Business You Want to Buy?
“The first question to ask is if the business is profitable,” von Gootkin says. “If it is, you’re likely to pay a premium price for it. If it isn’t doing well, you may get it for a bargain, but then what’s your plan to turn the business around, and what are the costs associated with doing so?”
It’s most important to make sure the company offers added value, advises Caleb Garrett, a startup and growth stage advisor with Hawkers Co. “In the case of Stumptown and Peet's, it makes sense. Stumptown has incredibly good coffee and a following and Peet's is competing with Starbucks and Coffee Bean."
How is Your Core Business Doing?
Taking a close look at your existing business is also imperative. “Only consider buying or launching another business when your current business is on a growth trajectory and running well enough that you don’t need to micromanage it,” advises von Gootkin. “Once your business model is up and running efficiently, you’ve reached some level of success that is likely duplicable.”
Closely tied to this is the financial status of your business and your available time to dedicate to the new company. “If you’re acquiring a business, you need to make sure you have the financial resources, including positive cash flow, and that you and your team aren’t spread too thin already, but have time to dedicate to the new company,” von Gootkin says.
What is the Strategic Need and Fit?
“Too often small-business owners focus on the what rather than looking at the why," says Jesse Williamson, director of the 9.8 Group, Inc. “When our holding company looks at acquisitions, we only consider opportunities that speak directly to a strategic need that we are ready to address. Analyze why you want to acquire the business. Is it to strengthen operations, sales, marketing or branding, or to acquire new products, expand your offering and leverage your existing platform?”
Strategic fit is critical, Aspatore agrees. “You need to know exactly what you are buying, what employees you are inheriting and how you plan to achieve a return on your investment in an acceptable time frame,” he says.
How Does It Fit With Your Business Culture?
Acquiring a business may look good on paper, but don't forget to also factor in your business culture, Williamson warns. “Your corporate culture could make a merger seem like a pairing of oil and vinegar—or worse, nitro and glycerin. The merger of two divergent cultures can be a far greater challenge than structuring a deal. Few businesses have thrived in the face of a contentious, toxic environment.”
Williamson suggests thinking about how all your people will work together, what kind of cultural adaptation will need to take place and who will drive those changes.
Should You Merge the Companies?
Whether you should combine your new and old businesses or keep them separate and standalone, as is being done with Peet's and Stumptown, depends on a variety of factors, believes Gregory Schern, CEO of Ogden Made and Tamrac.
“The decision to merge a business or keep it as a standalone comes down to synergy,” he says. “Things to consider are administrative costs, sales strategies and structures, customer segmentation and team member skill sets. Businesses that have great management teams in place, processes that work and products that customers love are very difficult to change for the better. In those cases, it is best to simply allow the business to continue building on its success with the additional support it needs. Often, businesses are acquired in a depressed state and there is no other choice but to merge the companies, apply solid management principles and right the ship.”
Aspatore suggests waiting before making the decision whether to merge. “Generally speaking, it is wise to let the business continue running as-is for a period of time so you get a true understanding of the company,” he says. “Within as little as three months, you’ll have an idea if your initial assumptions were true, and then you can more confidently move ahead with your plans.”
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