Small business acquisition occurs when one business entity transfers its assets and equity to another. The buyer then assumes control and ownership of the acquired business. In short, one is sold to and absorbed by another.
Like most business processes, an acquisition is not necessarily good or bad to either the buyer or the seller. It depends on the purpose and value gained by the parties involved. As a virtually inevitable business event, here’s why you should focus on improving small business acquisition.
The main reason and motivation why businesses are after a small business acquisition is because of the opportunities it provides. For one, all assets of the acquired business are transferred to yours–land and location, equipment, trademarks and patents, stocks, and even talents. Small businesses are especially enticing because of the access they provide to the community previously served by the acquired entity. This applies especially to larger enterprises, which might encounter difficulties penetrating smaller or more distant markets.
Aside from the material and positional advantage, a more important benefit of acquiring a small business is the talent and skills it provides. Once they’ve become a part of your organization, you can observe and utilize good business practices and employee habits. If some of their processes overlap with yours, you can even ask them to train your own employees.
Be warned, though, since business acquisitions regardless of size carry risks of their own. In fact, a 2018 report from Deloitte shares that over 55% of executives surveyed saw about 25% of their deals falling short of their expectations. Improving your small business acquisition includes scouting, negotiation, and meeting the terms as agreed upon with the to-be acquired entity.
Another motivator for small business acquisition is boosting your company’s own processes. Usually, businesses work to acquire another business whose industry or processes are similar, related, or relevant to their own. An easy example is a fast-food chain acquiring another, or when pharmaceuticals acquire small yet specialized research facilities.
At a time when most businesses have had to weather the effects of the pandemic, acquiring even a small business could give you a nudge toward recovery. Not only does it save the employees of the acquired company, but also gives you a new revenue stream. Going back to the synergy between businesses, having a relevant business under your umbrella instead of dealing with them as a supplier saves you a lot of resources, such as time and costs.
While the overall market is generally far from fully recovering from the economic upheaval of the coronavirus pandemic, the acquisition segment is already starting to look up. The Small Business Optimism Index, a mood meter for small businesses conducted by the National Federation of Independent Business (NFIB), remains positive at 98.4 The deal volume is starting to stabilize at a healthy volume, especially in the sectors of e-commerce, home improvement, liquor, and pharmaceuticals.
Also, another incentive for improving your small business acquisition efforts is that interest rates remain relatively low, which makes deals available at lower costs. However, remember to stay prudent and diligent when seeking small businesses to acquire. Lower average prices could be an invitation to empire building, even when some of these acquisition targets are not really profitable or significant in the long run.
Diversification remains one of the safest risk management strategies in business. As you acquire another business, you gain additional revenue streams that can help you spread and therefore minimize risk. Of course, different assets react differently to economic events and it can be a burden as much as it can be a benefit.
For example, you have a smartphone manufacturing business that has acquired a small manufacturer of integrated circuits (ICs). In the event that the market turns to a new technology far from what you develop, your smartphone business might take a hit but the ICs that are ubiquitous even among different models could pick up. This give-and-take situation could reduce your losses or even result in a net profit for the entire group.
To thrive and even grow in this changing landscape, businesses must learn how to make small business acquisitions work in their favor. More than a mere business process, identifying the right entities and utilizing them well are skills that can definitely work wonders for your organization. However, always remember to do your research first, due diligence during, and the right mindset after a small business acquisition deal.