Mergers and Acquisitions: What Should Your Strategy Be?

Are you contemplating buying a competitor or a complementary business? Take the time to carefully define your strategy while considering the market and the objectives you want to achieve.

There are always risks to acquiring a business, which is why, before you start, you need to analyze market developments and take account of numerous factors that can impact the transaction’s success. These include:

Above all, your strategy must pinpoint all of your business’s objectives in making an acquisition as well as your medium- and long-term goals.

What do you want to achieve with this acquisition?

There are many reasons why you might want to buy a business. To properly assess the scope of such a transaction, you must first understand what needs it meets and consider the alternatives.

During the evaluation process, several risks or mitigating factors may be raised. It is important to keep your initial objectives in mind during the analysis to ensure that they are met.

Growth

Business growth can be organic, based on demand and new skills, but acquiring a competitor or complementary business could provide you with an opportunity to enter a new market or increase your market share in a specific territory. Among other things, you could reach a new target clientele, broaden your range of products and services or expand your distribution channel.

If your business has reached and exceeded its break-even point, the contribution margin from the newly acquired volume could further increase your profitability.

Flexibility

You may wish to initiate or complete a vertical integration by acquiring or merging with suppliers or customers in order to increase your organization’s flexibility and competitiveness. For example, this M&A strategy could be an opportunity for you to:

Cost reductions

In some cases, the purpose of a merger or acquisition may also be to achieve economies of scale by increasing your buying power and reducing your administrative costs.

For example, you can take advantage of a well-established agreement with a supplier or leverage your negotiating power with an existing supplier by increasing your purchasing volume.

What risks should be considered?

The status quo can often lead to a loss of competitiveness and market share in the short to medium term.

In addition to the risks of doing nothing, you should also consider the potential risks of proceeding with an acquisition. Ask yourself if these risks are manageable for your company and if the transaction is “worth the risk”.

Once you have weighed the risks and benefits, you can make an informed choice and prepare to reduce any change impacts.

Poorly evaluated costs or timelines

Quite often, there is a temptation to wear rose-colored glasses when considering the potential savings from synergies in a merger or acquisition. Entrepreneurs may underestimate the time needed to achieve these savings or minimize the value of the upgrade investments.

This may include the training required, the acquisition of missing skills, or the integration of IT systems and streamlining of manufacturing.

It is essential to take the time to evaluate the various possible scenarios, taking into account the resources needed to successfully integrate the operations of the companies involved.

Lower-than-forecast growth

Another risk is that growth may be lower than originally projected. For example, a business merger or acquisition may result in some customers leaving the company. One way to reduce this risk, in addition to a good preliminary assessment, is to plan for new products or services that will generate long-term sales.

There may be a slowdown period before the planned growth occurs. It is wise to include this in your forecast.

Value that is not easy to quantify

When it seems difficult to quantify the value acquisition, for example when buying a company to acquire a competitor’s expertise, the deal can be strengthened by negotiating agreements with key employees.

For example, more and more entrepreneurs are opting to offer a percentage of the company’s shares (e.g., 5% to 10%) to their key employees. This allows employees to build a strong sense of ownership and feel more engaged.

In any case, if you are considering acquiring a strategic value that is not based on financial logic, you need to look beyond the numbers and ask yourself: what is the price of doing nothing? In a consolidating market, staying small without differentiating features will never be a good option to remain competitive.

Finally, before undertaking a merger or acquisition project, you should also assess the risk of a clash of values and corporate cultures. If management styles are at odds, synergies will be slower and buy-in to change much more complex. Your risk of losing employees is also increased in this context. You can reduce these risks by acquiring a company that shares your values.

What is your best strategy?

The indicators are generally positive? Then you also need to assess whether the acquisition is the best way to invest your financial and human resources before taking action.

The important thing in such a process is to ask yourself all the right questions and consider the risks with the broadest possible vision, while thinking of ways to mitigate them.

In addition, financing solutions should be explored in depth to get the most out of a merger or acquisition strategy. In a context of rising interest rates, the impact is magnified, and it is important to obtain a credible financing scenario before making a decision. Our financial advisory experts can assist you in this process and cover any blind spots.