By Mario McKellop
If a company wants to scale up quickly and regardless of market conditions, it can do so through by acquiring a smaller firm. Taking this action can result in several positive outcomes. Primarily among them, it can improve profitability, remove competitors from the marketplace and provide an organization with new resources, competencies and market opportunities. However, in order to get the full benefit from using an acquisition to scale up, executives need to make a few key considerations.
What Will Be Gained by Making the Acquisition?
As this McKinley & Company piece explains, having a long-term strategy in place is mission critical when contemplating an acquisition. For instance, social media platform Facebook purchased photo sharing service Instagram to increase advertising revenues and to expand its user base. It acquired virtual reality tech firm Oculus VR to establish a foothold in emerging virtual-reality market.
In spite of profound market skepticism regarding those acquisitions, both purchases helped Facebook grow by increasing income and expanding its existing user base. But instead of making acquisitions for the sake of growth alone, the company’s leadership worked out exactly what they wanted out of each company. Attempting to scale up via acquisition without a plan in place is a recipe for disaster.
Can Your Team Properly Handle a Major Acquisition?
Another important factor to consider when making a major acquisition is whether or not you have team members in place who can oversee the project. This Entrepreneur article relates a relevant anecdote about a Texas real estate company that scaled up by purchasing a large portfolio of properties outside of its core geography.
Ultimately, the realty firm’s acquisition resulted in positive outcomes because it was a smart purchase and because the executive assigned to manage the new assets had a proven track record and the leadership skills necessary to exceed expectations. Without an A+ player spearheading the acquisition and integration process, the whole endeavor is doomed to failure.
What Are the Risks Associated with Making the Acquisition?
Lastly, it’s very important to understand the potential risks associated with every potential acquisition. Buying a new company comes with several challenges, not the least of which is the financial fallout. Before any money is spent, an executive should have a solid forecast of the costs involved with acquisition and integration. Failing to do so can result in an unexpected and potentially debilitating cash crunch.
Additionally, it’s important to be aware of integrational issues, such as potential personality clashes involving the newly acquired workforce and the creation of asset redundancies. If not handled correctly, these problems can have a hugely deleterious effect on operational efficiency and profitability.
As long as the above-listed considerations are taken into account, making acquisitions for the purpose of scaling up can be the hugely beneficial strategy for a burgeoning company.