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Types of Successful Business Acquisition Strategies

Marsha Lewis
VP of Marketing at DealRoom
Marsha Lewis
VP of Marketing at DealRoom

Unfortunately, there’s no way to 100% guarantee an acquisition will be successful. Just like other standard business practices, some acquisitions are good, and some are bad.

Every business purchase needs to have a well-planned logic. When thinking of how to invest in another business, there are precise strategies to follow that can bring value.

At DealRoom, we help companies organize their M&A process. In this article, we go over seven business acquisition strategies that can launch a company toward success.

Types of business acquisition strategies

  1. Increase the Cash Flow and Profit
  2. Increase the Targeted Company’s Product Exposure
  3. Exploit a Company’s Ability to Grow Based on Its Specific Industry
  4. Consolidate and Cut Out Excess Capacity
  5. Finding a Business That Offers Valuable Technology or Skills
  6. Pick a Business That Has the Ability to Grow Right from the Start
  7. Consolidating Will Modify the Way Your Competitors Behave

1. Increase the Cash Flow and Profit

A successful business strategy that can help you create value is to upgrade your business’s target performance. In order to cut costs drastically when buying a business, buyers can increase cash flow and profit. 

Sometimes teams will need to monitor specific actions to accelerate revenue growth. Companies that follow this strategic approach are sometimes the most prosperous.

For private equity acquisitions, the profit percentage jumps up to 2.5% more than those with similar firms at roughly the same time, so multiple acquisitions may end up having higher operating income margins.

Keep in mind that boosting a company’s performance using low margins and low ROIC is better than fixing one with high margins and return on invested capital (ROIC).

For example, let’s say a target company has 5% operating income margins. If the firm’s expenses are reduced from 95% to 90% of income, and the margin is increased by 10%, there is a potential 50% gain in value.

2. Increase the Targeted Company’s Product Exposure

Small businesses that have innovative products sometimes have problems reaching a relevant market.

For example, some small pharmaceutical firms don’t have large sales systems so they can’t establish essential relationships with doctors to get their products advertised.

More prominent pharma companies frequently acquire smaller companies and use their vast marketing networks to promote and sell their products.

This type of strategy can be used in all kinds of industries.

Identifying ways to cut expenses and lift margins when targeting the right company can increase profit without having to invest furthermore or make acquisitions.

3. Exploit a Company’s Ability to Grow Based on Its Specific Industry

Businesses benefit from economies of scale once their product becomes more profitable. Economies of scale can be achieved by expanding output and cutting expenses.

Experts regularly mention economies of scale as a primary source of growth and profitability in mergers and acquisitions (M&A).

If you decide to use economies of scale, make sure to proceed with caution and keep in mind that more prominent companies are already running at scale.

Merging two large companies that use the same strategy can lead to reduced unit costs.

4. Consolidate and Cut Out Excess Capacity

If you operate in a fully grown business area with extra capacity, acquiring a competitor can be a dangerous way to improve business.

When buying a rival company to expand your own business, you can reinforce its status if you discover a need to cut down the supply in order to accelerate demand.

A cut in excess can also be used when acquiring a company with more indirect consolidation in sales and R&D, which can add significant value to a company.

5. Finding a Business That Offers Valuable Technology or Skills

Nowadays, people often use this acquisition strategy.

All the big companies are doing their best to bring technology to their firm to get in the game and succeed.

Acquiring a company that has all the basic skills is also a delicate strategy. Building up these skills from the ground up when entering a new market can take time and cash so that acquisition can be a better accrual on investment.

6. Pick a Business That Has the Ability to Grow Right from the Start

Identifying a business that has strong growth potential and investing in it to help with the growth is another intelligent acquisition strategy.

This strategy can be used by a private equity investor and a private buyer with a good eye.

7. Consolidating Will Modify the Way Your Competitors Behave

This strategy is challenging because consolidation hardly changes how pricing acts between competitors, except when the consolidation lowers the number of companies in the area of interest.

Even if that happens, new firms that come in can still lower prices to get a stronger hold on market share.

Conclusion

These seven acquisition strategies are here to remind people who want to acquire that they need to plan ahead to reach their goals.

Expansion is possible when buying a business, but only if there is a calculated strategy in place.

dealroom

‍

Unfortunately, there’s no way to 100% guarantee an acquisition will be successful. Just like other standard business practices, some acquisitions are good, and some are bad.

Every business purchase needs to have a well-planned logic. When thinking of how to invest in another business, there are precise strategies to follow that can bring value.

At DealRoom, we help companies organize their M&A process. In this article, we go over seven business acquisition strategies that can launch a company toward success.

Types of business acquisition strategies

  1. Increase the Cash Flow and Profit
  2. Increase the Targeted Company’s Product Exposure
  3. Exploit a Company’s Ability to Grow Based on Its Specific Industry
  4. Consolidate and Cut Out Excess Capacity
  5. Finding a Business That Offers Valuable Technology or Skills
  6. Pick a Business That Has the Ability to Grow Right from the Start
  7. Consolidating Will Modify the Way Your Competitors Behave

1. Increase the Cash Flow and Profit

A successful business strategy that can help you create value is to upgrade your business’s target performance. In order to cut costs drastically when buying a business, buyers can increase cash flow and profit. 

Sometimes teams will need to monitor specific actions to accelerate revenue growth. Companies that follow this strategic approach are sometimes the most prosperous.

For private equity acquisitions, the profit percentage jumps up to 2.5% more than those with similar firms at roughly the same time, so multiple acquisitions may end up having higher operating income margins.

Keep in mind that boosting a company’s performance using low margins and low ROIC is better than fixing one with high margins and return on invested capital (ROIC).

For example, let’s say a target company has 5% operating income margins. If the firm’s expenses are reduced from 95% to 90% of income, and the margin is increased by 10%, there is a potential 50% gain in value.

2. Increase the Targeted Company’s Product Exposure

Small businesses that have innovative products sometimes have problems reaching a relevant market.

For example, some small pharmaceutical firms don’t have large sales systems so they can’t establish essential relationships with doctors to get their products advertised.

More prominent pharma companies frequently acquire smaller companies and use their vast marketing networks to promote and sell their products.

This type of strategy can be used in all kinds of industries.

Identifying ways to cut expenses and lift margins when targeting the right company can increase profit without having to invest furthermore or make acquisitions.

3. Exploit a Company’s Ability to Grow Based on Its Specific Industry

Businesses benefit from economies of scale once their product becomes more profitable. Economies of scale can be achieved by expanding output and cutting expenses.

Experts regularly mention economies of scale as a primary source of growth and profitability in mergers and acquisitions (M&A).

If you decide to use economies of scale, make sure to proceed with caution and keep in mind that more prominent companies are already running at scale.

Merging two large companies that use the same strategy can lead to reduced unit costs.

4. Consolidate and Cut Out Excess Capacity

If you operate in a fully grown business area with extra capacity, acquiring a competitor can be a dangerous way to improve business.

When buying a rival company to expand your own business, you can reinforce its status if you discover a need to cut down the supply in order to accelerate demand.

A cut in excess can also be used when acquiring a company with more indirect consolidation in sales and R&D, which can add significant value to a company.

5. Finding a Business That Offers Valuable Technology or Skills

Nowadays, people often use this acquisition strategy.

All the big companies are doing their best to bring technology to their firm to get in the game and succeed.

Acquiring a company that has all the basic skills is also a delicate strategy. Building up these skills from the ground up when entering a new market can take time and cash so that acquisition can be a better accrual on investment.

6. Pick a Business That Has the Ability to Grow Right from the Start

Identifying a business that has strong growth potential and investing in it to help with the growth is another intelligent acquisition strategy.

This strategy can be used by a private equity investor and a private buyer with a good eye.

7. Consolidating Will Modify the Way Your Competitors Behave

This strategy is challenging because consolidation hardly changes how pricing acts between competitors, except when the consolidation lowers the number of companies in the area of interest.

Even if that happens, new firms that come in can still lower prices to get a stronger hold on market share.

Conclusion

These seven acquisition strategies are here to remind people who want to acquire that they need to plan ahead to reach their goals.

Expansion is possible when buying a business, but only if there is a calculated strategy in place.

dealroom

‍

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