Why a Company May Acquire Your Business

The reasons companies make acquisitions vary widely and can be difficult to discern. Nonetheless, common patterns do emerge, and it’s possible to draw generalizations that assist in prioritizing your value drivers.

Why does that matter?

Knowing the reasons behind an acquisition will help you develop the most suitable marketing strategy for selling your company.

Larger companies acquire smaller companies because smaller companies are more innovative.

Why Companies Make Acquisitions

Spurs Innovation

Small businesses are more innovative than big businesses. Most innovation occurs in small start-ups as they are more agile and willing to take greater risks. Larger companies acquire smaller companies because smaller companies are more innovative – most innovations are created in small companies and then brought into the mainstream by larger companies. 

Examples include Uber and Lyft unseating much larger competitors in the $40 billion taxi industry, Airbnb making a significant dent in the $570 billion global hotel industry, or Netflix dominating the $100+ billion TV industry. 

Increases the Odds of Success

Companies make acquisitions because it’s difficult, if not impossible, for companies to predict winners in product launches, partnerships, strategic alliances, or acquisitions. By completing a large number of acquisitions, a company can increase its odds of success. To counter the low odds, competitors establish corporate investment funds to make either majority or minority stakes in a large number of upcoming start-ups. The majority of well-established tech companies have large, dedicated teams who are exclusively devoted to making acquisitions. Note that I said acquisitions, not an acquisition. Companies attempt to defy the odds by completing a series of acquisitions, as opposed to relying on a single acquisition.

Reduces the Chance of Failure

In 2018, Jeff Bezos told his employees, “One day, Amazon will fail.” To think that the founder and CEO of a nearly $2 trillion company expects to fail highlights the dynamic changes that have taken place in business since the tech revolution began less than one generation ago. Large companies have high failure rates. They often have too many resources. Losses are huge when an innovation at a large company fails. By acquiring other companies, large businesses reduce their long-term chances of failure.

Specific Reasons a Company May Acquire Your Business

Access to Technology

With superior distribution networks, a large company can scale a solution out to the masses at a much faster clip than a small start-up with a limited marketing budget and sales team. By widening the acquirer’s product suite, the company provides a broader range of solutions to its customer base and will likely lower customer attrition and improve retention. 

But, it isn’t just access to technology – rather, it’s access to technology that has been validated by the market. Companies look to the ultimate decision-maker – the customer – to determine the potential success of a product. 

Access to Markets

Other companies acquire a business as a fast entryway into a different geographic or customer market segment. For example, a software company in the restoration construction space could acquire a software company in the industrial construction sector. One of the objectives of the acquisition would be to gain quick access to the customer base, and gain immediate reputation and credibility in the industrial sector. Such a move could allow it to roll out its existing suite of products or services to the customer base of the company it purchased in the industrial segment. Without the acquisition, the company may have a difficult time making the leap from one industry to another, so the acquisition shortcuts the leap and mitigates the risk associated with doing so.

Access to Customers

A major objective for some companies is access to strategic customers. Perhaps a company has made countless futile attempts to gain access to blue-chip customers in their industry, and their attempts have been in vain. An acquisition would be a guaranteed method of gaining those customers if a competitor they purchase has existing relationships with those customers.

Roll-Ups and Multiple Expansion

Finally, a large, well-capitalized competitor may go on an acquisition frenzy, acquiring multiple small competitors and rolling them up into one large entity with the goal of consolidation and expanding the multiple of their company. This plan of multiple expansion is important because the larger the EBITDA, the higher the multiple will be when the business is sold. 

If the buyer is a financial buyer, they start by purchasing a platform company, which is typically a company generating a minimum of $20 million in annual revenue. They will then complete a series of small, tuck-in acquisitions to round out the capabilities of the platform company by adding customers, technology, and other products to their lineup. 

In roll-ups, consolidation is rapid, and premium pricing is temporary. If you don’t sell, you will be left to compete with the consolidated entity, which will have much more resources than you – including a larger sales force, stronger brand awareness, and premium pricing. Roll-ups are a great time to sell if this is occurring in your industry.

Diversity of Acquisition Strategies and Corporate Development

Acquisition Strategies Are Diverse

Even though the reasons for making an acquisition may be similar from company to company, acquisition strategies vary significantly from company to company. 

Some companies, such as 3M, acquire hundreds of small companies at early stages and therefore lower valuations. Other companies wait for significant customer validation before considering an acquisition and end up paying higher premiums. 

Corporate Development Strategies Are Diverse

Acquisitions are one of many corporate development strategies for companies. Well-funded companies establish strategic corporate development plans to supplement their strengths and mitigate their weaknesses. Corporate development plans include many strategies, such as:

• Internal research and development 
• New product development
• Partnerships
• Joint ventures
• Licensing
• Strategic alliances
• Mergers and acquisitions
• Divestitures and carve-outs to offload unprofitable business segments

In business, where there are no guarantees of success, a strategic corporate development plan is designed to maximize a company’s possibility of long-term success. M&A is one of many strategies in a company’s corporate development plan. 

How Reasons for Acquisitions Relate to Business Value

While reasons for acquisitions vary, focus on detecting common patterns in your industry that will help you prioritize which buyers to focus on. M&A is only one weapon used within corporate development, but the aim of corporate development is universal – to maximize company value. By understanding your competitor’s strategy and objectives, you can take concrete steps to target buyers most likely to pay maximum value for your company.

Conclusion

This chapter has covered a lot of ground about buyers and how to reach them. Keep in mind the four types of buyers:

• Individual
• Financial
• Strategic
• Industry and competitors

Once you have identified your most likely type of buyer, narrow down your approach to reach them directly. Consider the goals each type of buyer is likely to have. Understanding their goals, and identifying how you can help them achieve their goals, will help you ultimately sell your business. This leads us to the next area to focus on – marketing your company for sale.