October 29, 2018 | Last Updated on: June 15, 2023
A company acquisition can mean that your business is ready to take the next step. It can mean expansion, a pivot to a new industry, or a new goal.
But the excitement of acquiring another business can often lead to mistakes which can hamper or even derail plans of expansion or growth. So here are a few mistakes that business owners make when they’re looking to acquire another company, and how you can avoid them.
Maybe the biggest mistake you can make during company acquisition is acquiring that new company without an explicit purpose. Oftentimes business owners get caught up in the optics of a deal. It looks good, it sounds good, then it must be good, right? Sadly, it’s not always so simple.
What about the company you’re acquiring makes it such a perfect target? Is the new company an established name in a market you’re looking to penetrate? Does the new company fill a need or provide a product that you don’t provide already? Are you overtaking a competitor? Does the new company operate in a new business location you’re looking to enter?
Knowing exactly why you’re acquiring another business can prevent you from making strategic mistakes. An acquirer operating with a keen awareness of the business’s value and a deliberate purpose is an acquirer with a plan.
Maybe that plan is to collaborate with a seemingly unrelated business which can make your product even better. Maybe you’re acquiring a new business to show possible lenders that your company is generating more income, which, in turn, can allow for a better loan and more money down the line. Maybe it’s a combination of several factors.
But regardless of your reasoning, it’s important to be able to enunciate that reason. If you can’t put into words exactly why you need to acquire the company you’re considering, ask yourself why that is. That purpose is key to a successful company acquisition.
Acquiring another company can be very expensive. But a strategic acquisition can actually save you money on loans in the long term. So it’s important to take the time to thoroughly explore your financing options before pulling the trigger on an acquisition.
There are quite a few different ways to finance a company acquisition. You can take out a traditional term loan, where you repay your balance with interest over a certain amount of time. You can apply for a Small Business Administration loan, where qualified borrowers can get competitive rates from lenders backed by the federal government. You can apply at a brick-and-mortar bank, or from an online business acquisition lender.
No matter which way you choose to borrow, making a mistake while financing can make the entire company acquisition a mistake.
Are you choosing the right type of loan? The right lender?
Before you present your case to a potential lender, you should comb over your business plan, financial documents, and application materials just like the lender will. Are those documents representative of a company which will benefit from the acquisition you’re aiming for?
In addition, lenders frequently want to see your projections for how the newly-formed company will perform. Are you being realistic with your expectations? Are your goals backed by data and sensible?
Remember, a loan is an investment. A bet. Make sure you’re seeking out the best loan for your company’s acquisition and make sure you’ve proven to the potential lender that your company is a strong bet. A misstep on either part can lead to massive financial headaches.
For example, if you’re acquiring a company in a new location or industry you’re unfamiliar with, consider their level of success or failure before you make wholesale changes to their business model. If the newly-acquired company is doing well in that location but they do it differently than you do, do you need to change their entire mode of operation to match yours? What works about the new company?
Or if you acquired a new company to help expand your existing business, ask yourself what your newly acquired resources could do to bring more revenue to your combined company. Does the new company give you access to some newly-uncovered marketplace that wasn’t available to you before the merger?
What impact could the new company have on your existing business’s finances? Will it take away business? Add to it? What do the changes in finances mean for your employees? Do you need to cut or expand payroll? These are the things that high-paid corporate consultants often refer to as synergy, and it’s not just for big corporations. Your business doesn’t need $1000/hour consultants for you to figure out how to make the two companies work better and more efficiently together.
Just because you know why you’re planning an acquisition doesn’t necessarily mean you’ve worked out how you’re going to do it; those answers should speak to one another. Make sure your strategy with the new company doesn’t hurt your goals.
Yes. Now that you’ve acquired another company, it’s technically yours to play with as you see fit. But change for the sake of change isn’t necessarily a good thing in every case. Sometimes, you need to back up and let the newly acquired company function as it already functions.
This can mean allowing your new company to have a different workplace culture than your current one. It can mean a different business model or methodology. If something about the new company is working, you need to be able to recognize that it’s working and not feel the need to move things around simply because you can.
Think about how Whole Foods has been affected by its acquisition by Amazon. Instead of Amazon completely rebuilding a perfectly functioning grocery store chain, Amazon infused Whole Foods with its existing brand strategy.
A new company means new employees. They may have spent years together. They can take your business to an entirely new level if you let them work to the best of their abilities. So be humble about the fact that the way they get to the best of their abilities might differ from your own.
Frequently all at the same time. But cool-headed thinking and proper strategizing can help you avoid common mistakes that acquiring company owners are prone to make, like the ones outlined above. One last mistake you can and should avoid is getting the wrong kind of financing for your new venture. Make sure you have the business acquisition financing you need ahead of time, and you’ll be on your way to a more successful merger than the kinds you hear about on the financial news.
