Buying a business and going through the deal process is intense for all parties involved. In my view there are only three reasons where you should consider buying a business.
Reason 1: Building scale
Where you have access to capital then undertaking deals is the quickest way to grow and drive scale. You can double revenue with a single deal – that would take 5 years of 20% organic growth to do through the normal course of business.
Building scale also creates the opportunity to achieve cost synergies, removing duplicate costs (such as professional service fees) and being in a better position to negotiate with suppliers based on economies of scale both lead to a healthier bottom line.
Reason 2: Entering into a new market
Whether this is driven by geographic expansion or offers a lower market entry cost than building something organically, buying a business is (generally) a quick way to enter a new market. Highly regulated markets or markets with high barriers to entry are exceptions to this.
Geographic expansion, particularly within national borders can be accelerated by buying a business where there is already local presence and strong brand equity.
Reason 3: Acquiring a new capability
Acquiring new capabilities also means acquiring new revenue streams, bringing new capabilities and sources of revenue in-house can be driven through acquiring them. Moreover, as long as the intellectual property (IP) of the target business is within the scope of the deal perimeter then acquiring IP can be a good way to accelerate research and development within the group of businesses. Accessing new ideas and a skilled work force can be a strong driver for acquiring a business.
Whilst building scale, entering a new market or building new revenue streams can all be done organically and outside of the deal process, undertaking an M&A journey can help to accelerate progress and lead to quicker results. In doing so you’ll need to make sure the target business is suited to those drivers and integrated appropriately.