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Mergers and acquisitions are great opportunities for small businesses to take the next step. A business acquisition can help expand your current operations or support a pivot into a new market or industry.

The excitement of acquiring another business, however, can often lead to mistakes that hamper or even derail plans. We break down some of these mistakes below and how you can avoid them.

In this article:

• The benefits of business acquisitions
• Common mistakes business owners make during company acquisitions
• How to avoid corporate acquisition mistakes that can set businesses back

Benefits of Business Acquisitions

Corporate acquisitions can be one of the best ways for small businesses to expedite growth. With a good integration process and proper due diligence, you can give stakeholders in your business an immediate boost. Some of the primary benefits of business acquisitions include:

• Increased market share: By acquiring a competitor, you can gain a larger market share, access new markets, and strengthen your position in existing ones.
• Diversification: Acquiring competitors or suppliers can help reduce your dependency on certain supply chains or services.
• Access to talent: Retaining key employees after an acquisition will help improve your company’s team.
• Reduced costs: While overall costs will likely increase, economies of scale allow larger companies to save money by consolidating operations, eliminating redundancies, purchasing greater numbers of wholesale materials, and optimizing resources.
• Competitive advantage: Merging with an acquired company combines your business strengths with theirs, which may reduce or eliminate your business

Common Business Acquisition Mistakes

From poor integration plans to improper business valuations, there is a lot that can go wrong during a corporate acquisition. These are four of the most common mistakes and how to avoid them.

1. A lack of purpose

A significant mistake is a company acquisition that lacks an explicit purpose. Business owners often get caught up in the optics of a deal.

The most fundamental part of the mergers & acquisitions (M&A) process is identifying why a business acquisition makes sense. Some of the reasons why companies acquire other companies include:

• The company is an established name in a market you’re looking to enter.
• The company fills a business need or provides a product that your company doesn’t.
• The company is a competitor and you want to carve out a larger market share.
• The company has real estate in a new business location you’re looking to enter.
• You’re overpaying for certain materials and the new company can reduce those costs.
• You’re looking to increase cash flow to facilitate loan opportunities like equipment financing for additional business growth.

Knowing exactly why you’re acquiring another business can prevent you from making strategic mistakes. You must do your due diligence to understand the business’s value and have a deliberate purpose.

Regardless of your reasoning, you must be able to readily identify the “why.” If you can’t put into words exactly why you need to acquire the company you’re considering, ask yourself why that is.

2. The wrong financing

Acquiring another company can be very expensive. A strategic acquisition may save your company money in the long term, but only if you line up reasonable financing ahead of time. This is another crucial part of the M&A process.

There are quite a few different ways to finance a company acquisition. Some of the most common include:

• Traditional term loan: A lump sum, upfront loan repaid with interest over a certain amount of time.
• U.S.Small Business Administration (SBA) loan: Loans backed by the federal government that reduce the risk of default incurred by lenders.
• Commercial real estate loan: Loans expressly designed for real estate purchases that use the property itself as collateral.
• Equipment financing: Loans for equipment purchases that can allow you to acquire a business’s tangible assets without buying the business itself.

Loans are available from both traditional banks and online lenders. Depending on your specific acquisition process, both have advantages and disadvantages. Online lenders tend to have less strict eligibility requirements and faster funding times while traditional lenders often offer higher loan amounts and lower interest rates.

Identifying the right type of loan and the right lender is crucial. Before you approach a lender, make sure to research available interest rates, get your credit score in a good position, and gather your business plan and financial documents, like balance sheets and tax returns.

As part of the diligence process of any M&A deal, you should perform data analysis to develop reasonable projections and timelines for the new company’s performance.

You don’t want to take on a loan that must be repaid quickly with high interest rates. As such, it’s crucial to seek out the best loan for your company acquisition and presented a strong case to your potential lender to lock in the best loan terms possible.

3. Poor M&A strategy

Starting from defining a strong purpose for a business acquisition, you need to understand exactly how your M&A integration will work. The way you treat your new company and its employees post-close can make or break the acquisition.

One of the potential pitfalls of a business acquisition is  not understanding the company culture or operations of this new addition to your business.  Even if you’re acquiring one of your fiercest competitors, you must remember they were such strong competitors for a reason.

A crucial component of acquisition strategy is recognizing what the new company adds to your existing business. That could be access to a new market, improved equipment, access to more cost-effective suppliers, or talent.

On the other hand, it’s just as important to understand the impact a new company may have on your business finances.  Big changes have big impacts on company culture and morale, so it’s important to plan ahead and be transparent about any major changes.

4. Changing things just because

Now that you’ve acquired another company, it’s technically yours to manage as you see fit. But change for the sake of change isn’t necessarily a good thing. Sometimes, you need to back up and let the newly acquired company function as it already functions.

Cutting costs or making changes for business reasons is one thing; forced assimilation to the way your company does things is another. In many mergers or acquisitions, the two companies can often continue with business as usual.

If you’re acquiring a company in a new location or industry you’re unfamiliar with, consider the acquired company’s success or failure before you make wholesale changes to its business model. If that company has performed well, why change the roadmap? The goal is to make money, so the retention of key people and supporting existing operations can be the best solution.

In some cases, you’ll need new employees to learn new technology or assimilate to certain workflows and workplace policies. But companies that change things that are working just because they’re a little different risk alienating employees and derailing the new company’s operations.

The Bottom Line

Business acquisitions can be exciting, scary, nerve-wracking, and difficult. Like any business decision, proper planning can help you avoid common mistakes that acquiring company owners often make.

FAQs

What is a business acquisition?

A business acquisition is when one company buys most or all of another company’s shares to gain control of its assets and operations.

Why do businesses acquire other businesses?

Company mergers and acquisitions happen for a range of reasons. Sometimes, a business may want to buy another to gain access to a new market, increase its market share, or support a pivot into a new industry.

What are the most common mistakes business makes when acquiring other companies?

Some of the most common mistakes include failing to identify a clear business purpose for acquisition, using the wrong financing, and poor integration strategy.

What are the best types of financing for business acquisitions?

Some of the best types of financing for business acquisitions include term loans, SBA loans, and commercial real estate loans.

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