The Shortest Distance from Where You Are to Where You Need To Be: Growth by Acquisition

Posted on: April 4th, 2017

Growth by acquisition

Acquisition has often been termed as “the shortest way to get from where you are to where you need to be,” and to a large extent this is true. Companies use acquisitions to strengthen their position in various areas ranging from increasing market reach, to greater cost competitiveness, to business model expansion.

Depending on their current needs and financial position, companies use acquisition for the following reasons.

1. Expanded market reach:

Companies use acquisitions to expand their market reach for both geographic and demographic reasons. For example, a second company in the same industry, but in a different market area, will lead to a greater coverage of the total market share.

2. Economies of scale:

Companies acquired in the same industry can result in reduced cost due to economies of scale. A combined, larger entity will increase efficiency in production and other aspects of business operations leading to considerable cost savings.

3. Wider Product Line:

Buying a product line is often easier that creating a new one on your own. Products that are complementary to your existing product set and can use your existing distribution channels are highly beneficial.

4. Acquiring specialized talent:

Acquisitions bring in additional resources such as valuable human capital that that companies can leverage to their advantage. New specialized talent brings energy and innovation to an older more established enterprise.

5. More integrated business model:

Most companies are not uniformly strong across the entire range of activities they are involved in. Some are better at sales, while others better at production or delivery. An acquisition can help you remedy this, by strengthening the weak link in your business model, and help you gain more power in the value chain.

6. Organic growth:

An acquisition, if highly strategic can unlock greater organic growth paths within your company. It can be means to combine resources, reduce costs, remove duplicated facilities or departments and increase revenue.

Make your smart acquisition the shortest distance between two points, to get to your ultimate destination.

As the Fed decides to ease interest rates, middle market acquisition financing structures will benefit in a number of ways. The underlying values of middle market companies will increase leading to a higher enterprise value and lower loan to value ratios for existing portfolio companies of acquisition financing lenders.

The role of acquisition financing is infrequently elevated above a functional transactional one. When a business needs financing to acquire, they go to the market and source acquisition financing to supplement their equity investment to close the deal. Despite existing in many different forms, acquisition financing is rarely explained in terms of the value it brings to the acquirer.

Acquisition financing underwriting usually focuses on business and financial issues that underpin the stability of cash flow. Providers of acquisition financing usually validate the durability of a company’s competitive advantage and the depth of its resource base. Environmental issues are usually not a major part of the analysis in today’s service and technology-based economy.