Mergers and Strategic Acquisitions: Buy, Sell, or Grow Organically. Which Growth Strategy Drives Small Business Success?
Written by Lisa M. Masiello
The topic of mergers and strategic acquisitions across all industries remains hot. It’s seen as a significant driver of business growth and even an opportunity for small business success. Global consultancy firm Deloitte reports in their 2022 M&A Trends Survey that the second half of 2021 saw a total of 4,789 M&A deals take place.
While the technology services sector remains the consolidation leader, businesses in finance, commercial services, producer manufacturing, distribution services, consumer services, industrial services, healthcare, retail, and others see equally impressive deals and opportunities in 2022.
While COVID-19 pressures play a part in some owners considering a change in their business’ direction and consolidation, others see a range of merger and acquisition opportunities as a bright path to the future. To them, it’s a positive step to more quickly achieve their strategic business goals and grab opportunities that may still be unidentified by others. That is contrary to the common feeling that M&A is simply a means to eliminate ongoing pressures or overcome business limitations.
Mergers and Strategic Acquisitions Often Fall into These Two Categories.
Entrepreneurial exit strategy
You're most likely familiar with the term serial entrepreneur. That is a person who starts one business after another, or even multiple companies simultaneously, with the goal of growing each entity to a pre-determined level and then selling it. The entrepreneur then starts a new business with the available funds, continuing the cycle. The key is that their exit strategy is clear from the moment each company is conceived.
Organic growth and competitive buyout
Larger, more established businesses that want to increase market share, industry penetration, or product portfolio may first consider how to achieve rapid growth internally. That is, how will they grow their customer base, product offering, geographical footprint, or vertical focus organically. While this should be a serious consideration, it is essential to remember that organic growth takes time and money.
After thoughtful analysis, these firms determine that they can significantly increase their speed and level of development by acquiring smaller competitors who already have the customers, industries, geographies, or services they need.
Evaluate which option is best for your business—assessing whether to transform your business internally, acquire another company, sell to another firm, or divest your underperforming products and services.
Small Business Growth Strategies: Merger, Acquisition, Divestiture, or Organic?
Whatever you call it—a merger, acquisition, divestiture, or organic growth, it is all about business transformation. Let’s look at the distinctions between mergers, acquisitions, divestitures, and organic growth.
Merger
A merger is like an acquisition in that it unites two independent companies into one. It is different than an acquisition in that a merger is the union of two similarly sized businesses which agree to move forward as one new entity, usually with a new name. A merger is commonly completed to add value to both companies by expanding into new market segments, gaining market share, or growing a company's geographic reach.
The merger of two separate entities can enable the newly formed company to benefit from the best expertise, personnel, products and services, and market penetration/differentiation that each brings to the relationship. A merger of equals enables the companies to more quickly and easily overcome the issues of capital outlay required as part of an acquisition and the issue of time-to-market, which can be dramatically shortened with a strategic merger rather than organic growth.
Acquisition
An acquisition is different than a merger in that one company buys a 51-100% stake in another company, taking control of the acquired company and all company assets.
The acquisition could bring a large established customer base, technical talent, geographic diversification, an expanded portfolio of complementary services, and immediate growth opportunities that could take years or even decades to achieve if managed organically.
Divestiture
In a divestiture, specific assets of the company are sold. That could include selling a business unit, products and services, or other assets. The company's management often chooses to divest itself of assets because they are no longer of strategic value or drain other resources.
The divestiture may help refocus the business onto its core objectives and business goals. One should not assume that the company has been mismanaging its business. Instead, it is often a way to enable a company to grow even more quickly.
Organic Growth
Organic growth is the growth a business achieves through its increased production of products and services and sales. The company's goal is to meet and exceed its revenue and earnings objectives yearly.
An existing business can achieve organic growth with an increase in output (producing more stuff), an expanding customer base (selling to new customers), and new product development (launching new products and services). Organic growth takes time to achieve—much more time than if the business was acquired, merged with another firm, or acquired other companies to grow.
So, if your ultimate end goal is the continued growth of your small business, there are several ways you can achieve this. However, deciding on which one is appropriate will depend on things like your market position, cash on hand, the competitive landscape, staff expertise, and your product portfolio.
What is Your Small Business Growth Strategy? To Be Acquired?
Are you interested in someone else acquiring your business?
Selling your business can be the easiest, cleanest, and fastest of all M&A solutions. That is especially true if all you’re interested in is getting as much money as you can to start another business or travel off into the sunset to enjoy life. Since this is presumably a company you have nurtured from the beginning and given your blood, sweat, and tears to, consider what will happen to the business once you leave. That will help determine if a strategic acquisition aligns with your goals.
Before you make a hasty decision, here are five considerations:
1. What is Your Motivation for Selling?
Some owners include the sale of their company in their strategic plan before they even have their first customer. The owner’s goal may be to retire early, receive a cash windfall or move on to start another company. Do you feel the same way? Consider that there may be things you are overlooking.
Do you have a passion for what you do, your industry, and working with customers? Or are you simply focused on the dollars at the end of the rainbow?
Are you interested in stepping away from the company's daily management but want to maintain some ownership stake so you will continue to receive payments over time?
Have you considered the effect that the sale will have on your staff? Will they be offered an ownership share in the new company? Are the new owners considering moving or consolidating your company's location, requiring your employees to relocate or lose their jobs?
Thoughtful consideration of why you want to sell the business will help provide the answers to when, how, and to whom you sell.
2. Differentiation.
What makes your business different from the rest? Why should you be singled out as a potential acquisition candidate and one that will command top dollar? What is your differentiator?
Differentiators like a unique service, geography, industry, or another area of focus will not only enable your business to stand out but add significant value.
In addition, if you are looking to be acquired, having an expansive client list is no longer enough to help you stand out. Product and service differentiation and diversification are the primary drivers for interest in your company.
3. Sales Reign Supreme.
You may think it unnecessary, even silly, to say that sales reign supreme. Don’t they reign supreme for every business?
Remember that many small businesses are often run by owners or executives who started their careers in a single department at a much larger organization. For example, a buyer of women’s apparel at a large national retail chain may leave her corporate position to open a small boutique selling a new women’s athleisure brand. Or, a Microsoft software engineer may use his expertise to develop a new cloud-based security application subscription business that protects remote workers from the latest security threats.
While expertise in clothing trends and high-tech security measures are essential elements of these owners’ businesses, a potential suitor will assess each company on results far beyond simply the clothing brand or software development’s value. In the case of an IT subscription business, things like ARPU (Average Revenue Per User), churn rate (number of customers who have stopped using your products or services over a specific period), MRR (Monthly Recurring Revenue), and CLV (Customer Lifetime Value) will be at the forefront of an acquisition discussion to demonstrate company value and generate top dollar for the business.
4. Marketing Strategy: Don’t Slow Down. Rev-Up.
It can be tempting to pull back on marketing spending when you decide to sell your business. You may want to reallocate marketing funds to another area or hold onto the money to show more cash on the books.
Any company interested in acquiring your business will do their due diligence, researching your position in the market, your product and competitive strategies, and success in acquiring new customers. They will quickly lose interest if you do not have a healthy offline and online marketing presence and a well-known, well-respected reputation. Maintaining the market perception that your business is assertive, dynamic, and strong is essential.
5. Eighty Percent of Success is Just Showing Up.
You may be familiar with this well-known Woody Allen quote, "80% of success is showing up." It sums up the fact that opportunities appear all around us and we must be present to take advantage of them. It is in your best interest to “show up” by evaluating every opportunity that comes along, no matter how small or insignificant it may seem. Companies known to be shopping their business around for sale are on the radars of industry analysts, potential corporate suitors, and others who have their fingers on the pulse of the market.
Accept their meeting requests. Listen closely to what they say. The buyout offer you receive may not be one you are interested in considering, but you may gain valuable insights like competitor and market intelligence. It can help you flush out the actual value of your business on the open market and may introduce you to potential companies that could be interested in doing a deal.
Maybe Your Small Business Growth Strategy is to Buy a Company.
Maybe your goal is not to have your business acquired by another company but to be the company making the acquisition.
Many small business owners take a long time to decide to pull the trigger on acquiring another organization. What holds them back? It's certainly not laziness or lack of ambition. In most cases, they are concerned that their existing business will suffer if they take their eye off the ball to pursue an acquisition.
Acquiring a new business can be a full-time job. It requires you to conduct all the preliminary due diligence and establish a team that will carry out the integration.
When purchasing a business, first ask yourself these questions.
Where will you get the money? Do you have the funds to finance this deal? Will you fund it yourself using personal assets, or will you take on outside investors?
What will happen to the senior management team of both organizations? Will your current team be responsible for managing all acquired assets? Will you require the acquired team to leave after a period, or will some be incorporated into your existing team?
Are you going to set up a formal integration team whose primary responsibility will be to integrate the acquired company into your organization successfully? Do you have people on staff who could take on this role? Is this the only acquisition you will be doing, or does your strategic plan include additional purchases? If so, how will you continue to run your company daily as its CEO and, at the same time, manage the acquisition and successful integration of other businesses?
Conclusion
Even if you have not formally decided whether your goal is to sell your business, buy another company, or divest underperforming pieces, it's important to include an M&A line item in your strategic growth plan from the beginning. That will give you a complete picture of all your options as your company grows and changes.
However, if you ultimately choose to buy another business, sell your business, or grow organically over time, the decision you make is as individual and unique as your organization. Never let any industry analyst, financial firm, or small business expert tell you that one option is better than the rest. Only you know what is best for your business based on your goals, priorities, readiness, resources, employees, and culture.
About Lisa M. Masiello
Lisa M. Masiello is a business owner, author, and coach who equips new and aspiring business owners with practical tools and clear knowledge to break free from the stuck phase and make real progress. With over three decades of experience guiding fast-growing startups and large corporations in their marketing strategy, she knows what it takes to build momentum and deliver results.
