How important is M&A activity for small to medium sized businesses?
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How important is M&A activity for small to medium sized businesses? The answer I believe is that it depends. I think it’s a matter of how effectively you can grow organically. If organic growth isn’t happening, acquisitions can be an effective growth strategy. And even if you are achieving strong organic growth, there is certainly value in being opportunistic as it relates to acquisition activity to further feed that growth. Thoughts?
I think on the opposite side that many small companies have one goal in mind…collect as many customers and as much revenue as you and sell fast!
My current client is about a 150 person business doing $50M in revenue that is acquiring a 350 person business doing about 150M in revenue. The reverse-acquisition of sorts will dramatically increase their offering and client base. The company being acquired is being carved out from a Fortune 50 conglomerate and no executive leadership is transitioning, meaning my client has not only full control over the direction of the newly acquired portion of the business but also the full responsibility for success or failure.
It depends – my experience with SME’s selling is that the founder/CEO is the core value of the business. But, for any SME that is acquiring or selling that has demonstrable value/assets in the business, M&A knowledge is imperative even if they are using an agent.
Acquisitions can be value accretive at very small sizes if strong platform capabilities have been formed in the acquiring business.
I think it depends on the owner or owners exit or expansion plan. SMB can be acquired or it can acquire other companies
I think it really depends on the purpose and goals of the SME. If it is just a lifestyle business with the ambition to be profitable and “business as usual” for many years, you can leave without M&A.
If you have ambitious targets, that is for instance double your size in 5 years, and you are not a startup, than you need M&A.It really depends on where you want to go as a company. I look at it as a three legged stool for those that want to optimize growth. Organic growth, Greenfield business, Acquisitions.
Marketing advantages
Choosing to grow through sales you can face a number of difficult to overcome difficulties. Experienced leaders know this. The process of attracting new customers has a saturation point, after which the efforts of the marketing team can resemble Sisyphean labor. In this case, buying a business with a ready-made customer base is a simple and logical move forward. If the merger process is fine-tuned, then the business will get new customers who are already loyal. For example, those who are familiar with service standards and who have long been regular customers. Thus, it is possible to significantly increase the customer base and at the same time not to waste time, effort, and money doing it in the usual traditional way.
Financial advantages
All companies make forecasts of their development. Even a small company, for example, a bakery, thinks about how many customers will come to them tomorrow, how many in a year. Naturally, business owners base their vision of how they will develop further on these assumptions. So buying another company is very beneficial in the sense that the leader can see the development of a competitor in a historical context and extract useful data from this to model his own company’s growth. Using historical rather than forecast data is always a more successful approach to formulating a company’s strategy.
Moreover, no less important financial aspect is the flexible role of the buyer in transactions. The business owner does not have to go to the bank for a loan. You can always negotiate the terms of the deal with the seller. For example, it is possible to agree on the procedure for repaying debt at a rate that is convenient for everyone, distributed over time. Furthermore, the seller may be involved in financing the new company or have some other financial role in the transaction.
Competition advantages
Buying a competitor will always lead to an increase in market share. If the owner of a cafe buys a nearby catering facility, then in this street he will own a larger share of the market. Even if he sells burgers and has now bought a café selling cheesecakes it means that he has mastered a new segment. It is also obvious that there always is one less competitor on this very street.
I think it depends on the industry as well. If the SME is in an agency or broking firm, the SME firm is better to identify and hire the key personnels from the competitive firm may rather than execute a relatively expensive M&A transaction unless an operation system or other logistics e.g. IT platform or licensing rights the SME wanna to acquire.
Hi Ryan:
I agree with your interpretation, especially in a global market with an increased amount of competition. Without the ability to grow organically, a company will likely look towards M&A activity to increase market share, etc.
~Pamala
I think M&A is absolutely an important growth strategy SMEs should consider. Like they say, if you are not growing, that means you are in a decline. Businesses need to be of certain size to compete and survive in the market – organic growth can be challenging if there is inadequate capital. Thus, when structured correctly, M&A enable SMEs to grow without the need for external funding.
@Ryan, I think M&A activity driven by SMEs should be something they do as a last resort: first, if the SMEs organic growth is slowing, leadership should first look at growth-promotion measures: product strategy, marketing strategy, price strategy, etc. Then it should do the same with cost-reduction measures: COGS efficiency, supplier strategy, process efficiency, etc. This is all to avoid being a company that pursues M&A before maximizing what it can do on its own to enhance its growth.
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