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According to research by the\u00a0Harvard Business Review, the traditional rules surrounding business acquisition for growth have been breaking down over the last two decades, with many businesses acquiring companies outside of their usual sector, in so-called \u2018non-synergistic\u2019 buyouts. This, they claim, has led to brands like the Sara Lee Corporation enjoying returns on investment of up to 35 per cent per year.<\/p>\n
Why might you consider growing your business with the\u00a0purchase of another going concern? Let\u2019s examine the key reasons for doing so.<\/p>\n
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1. OFFER NEW SERVICES TO EXISTING CUSTOMERS THROUGH ACQUISITION OF ANOTHER COMPANY<\/h2>\n
If you have built up your business and have established an attractive customer base, then\u00a0buying a business\u00a0may offer the perfect way of selling new services to them. For example, if your business offers payroll services to a large number of companies already, then you might consider adding an accounting software developer to your portfolio. With a pre-existing customer base it is often beneficial to both clients and service providers to offer a range of services, whether bundled in together or not.<\/p>\n
Your current\u00a0marketing\u00a0activities should mean that you already understand your clients\u2019 habits and buying patterns to a degree. You may also have access to some of their personal data, which gives you an edge in selling a new\u00a0product\u00a0or service to them. Essentially, buying a business which offers a related service to your current offering allows for \u2018bolt on\u2019 opportunities.<\/p>\n
Increasing the overall range of services to the same client base is something many strategic business leaders have done to grow enterprises. For example, when Microsoft bought the networking site LinkedIn for \u00a320 billion, there were two principle drivers.<\/p>\n
Firstly, they wanted to increase the range of services on offer for further engagement with business people. Secondly, they saw opportunities to improve the monetization of the LinkedIn brand by attaching their advertising platform to it. Certainly they are in a much stronger position to monetize the platform.<\/p>\n
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2. BUYING COMPETITORS LEADS TO GREATER ECONOMIES OF SCALE<\/h2>\n
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Any business can improve performance through greater efficiencies and increased\u00a0margin, and the easiest way to achieve this is by developing economies of scale. Reduction of costs per sale and overheads can be most quickly achieved through business acquisition.<\/p>\n
The\u00a0strategic buy out of one or more competitors\u00a0can lead to a\u00a0consolidation\u00a0of opportunities and lower\u00a0competition in most sectors business operate in. This will increase economies and\u00a0profitability\u00a0by reducing the number of offices used, sales teams and support staff as well as the potential for increase in turnover.<\/p>\n
A relevant recent case in point is\u00a0Tilney Bestinvest\u00a0purchasing Towry for \u00a3600 million. Both companies operate in the financial planning and investment management sector. The acquisition will allow Tilney Bestinvest to to immediately increase their profitability, achieved by increasing their portfolio of clients and financial products substantially. And, at the same time, the responsibilities for delivering to customers will\u00a0be able to be shared among a smaller workforce.<\/p>\n
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3. IN-HOUSE MORE INNOVATION AND DEVELOPMENT<\/h2>\n
Although there are other key considerations to make when weighing up a business acquisition, one that should be a high priority is your ability to innovate. Does your business struggle to continually come up with new ways of doing things and to develop its products and service\u00a0offerings? If so, you are not alone. Even business which have\u00a0invested\u00a0heavily in research and development functions end up taking considered gambles\u00a0on what might happen, and could be missing out on the \u2018next big thing\u2019.<\/p>\n
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One of the chief reasons to grow a company through business acquisition is to develop its share of the market. Buying competitors can lead to new opportunities and allow you to take extra ground in your sector. Greater market share can help you to avoid excessive localized competition which can lead to tighter profit margins, especially if you end up competing on price. Furthermore, acquisition of an established competitor is often a quicker route to growing your market share than attracting new customers to your existing brand.<\/p>\n