Acquisition is a method of expansion used by companies to speed growth, achieve synergies in their various operations and obtain control of assets. While the high-profile M&A deals of large corporations often make headlines, this form of business development is a common practice among small to medium-sized businesses, especially those looking to gain a competitive advantage through scalability or economies of scale.
The acquisition process is complex and involves a lengthy due diligence period. In addition, the acquiring company must determine how much to offer for the target company. This is typically based on multiple factors such as the company’s price-to-earnings ratio, enterprise value-to-sales ratio and other metrics comparing the company to similar ones in the same industry group.
There are several reasons why companies choose to acquire other businesses, including improving the quality of products and services by bringing in new skills or technologies more quickly and at lower cost than they could develop themselves, gaining access to markets that would be difficult to penetrate through organic growth, maintaining market share and eliminating competition, and cutting costs by acquiring suppliers that feed into production. However, these strategic rationales don’t necessarily guarantee success.
The other primary reason for acquisitions is that it can be more efficient and faster to buy an existing business than to build one from the ground up. The time it takes for a startup to reach the commercialization stage can be months or years, and it may take even longer for it to attain its full potential. By contrast, a mature company with established market presence and existing sales channels can rapidly grow its revenue and profitability through an acquisition.