In the dynamic world of business, growth and expansion are crucial for long-term success. While organic growth strategies are effective, strategic acquisitions offer a unique opportunity to accelerate growth, enhance market presence, and unlock synergies. Contrary to conventional wisdom that suggests acquiring a business with a higher valuation, this article explores the idea that growing a business through acquisition, where the multiplier of the acquired business is less than the acquiring business, can create a combined value greater than the sum of its parts. Let’s delve into the principles and benefits of such an approach.

Understanding the Concept

Traditionally, businesses seek to acquire companies with higher valuations to maximize immediate returns. However, focusing solely on the multiplier without considering other factors can limit the potential for long-term growth. By acquiring a business with a lower multiplier but with complementary strengths, the acquiring company can create synergistic effects that exceed the sum of individual valuations.

Tim Merryweather explains this further on the GrowCFO show. He talked about his early career in Mouchel plc, then a FTSE 250 company that grew rapidly through acquisition. As an aside, I joined Mouchel shortly after Tim left when my employer, Hedra, was acquired. Tim went on to explain how valuations are calculated, and we spent time discussing the risks of this sort of business growth.

Tim will join me in a webinar next week to explore business valuation in more depth. You can book your place here

Synergies in Acquisition

Lets look further at the synergies that might be present with an acquisition:

1. Market Expansion: Acquiring a business with a lower multiplier but a strong market presence can provide the acquiring company with an instant foothold in new markets or regions. The combined entity can leverage the acquired company’s distribution network, customer base, and brand recognition to propel growth and increase market share.
2. Operational Efficiencies: Combining the operational capabilities of both companies can lead to significant cost savings and increased efficiency. Streamlining processes, eliminating redundancies, and sharing resources can generate economies of scale and improve productivity. By integrating systems, technologies, and expertise, the combined entity can optimize operations and create a stronger competitive advantage.
3. Diversification of Offerings: Acquiring a company with complementary products or services allows the acquiring business to broaden its offerings. This diversification not only expands the customer base but also increases cross-selling and upselling opportunities. By leveraging the strengths of both companies, the combined entity can create a more comprehensive and appealing value proposition for customers.
4. Talent and Expertise: Acquiring a business with a lower valuation but a highly skilled workforce can enhance the acquiring company’s intellectual capital and foster innovation. By integrating the talent pool, the combined entity can access a wider range of skills, knowledge, and perspectives, fueling creativity and driving future growth.

Felix Velarde is in the business of buying and scaling agencies. He joined me on episode 108 of the GrowCFO show to talk through the important points

Maximizing Value Creation

It isn’t simply a case of glueing two businesses together though. There’s work to be done

1. Strategic Fit: A successful acquisition requires a thorough analysis of strategic fit. The acquiring company should assess how the acquired business aligns with its long-term objectives, core competencies, and growth strategy. A strong strategic fit ensures that synergies can be effectively harnessed and that the combined entity can capitalize on market opportunities.
2. Integration Planning: Post-acquisition integration is a critical phase that determines the success of the combined entity. Careful planning, effective communication, and a well-defined integration strategy are essential. It is crucial to identify potential synergies, develop a timeline for integration, and establish clear roles and responsibilities. By minimizing disruptions and quickly aligning the acquired company with the acquiring company’s culture and operations, the value of the combined entity can be maximized.
3. Long-term Vision: While immediate financial gains are important, the focus should be on the long-term vision of the combined entity. By leveraging the synergies and strengths of both companies, the acquiring business can create sustainable competitive advantages, expand its market reach, and generate significant value over time. This requires a strategic approach focusing on long-term growth and value creation rather than short-term financial metrics.

David B Horne joined me on a very early episode of the GrowCFO show to discuss his book “Add then Multiply” which describes the role of the CFO working with the CFO throughout the whole process.

Add then Multiply describes David’s FACE methodology:

• Fund
• Acquire
• Consolidate
• Exit

The FACE methodology is about getting step-by-step exponential growth in your business. It’s about selling and buying businesses for growth and development.

F is for Fund. This is all about the process by which you raise money. How do you go about doing that? What do you have to prepare and what are the different types of investors (family and friends for early stage, angels, and then more institutional means like venture capital).

A is for Acquire. Acquire within David’s framework is for more established businesses who want to scale up. The fastest way is through acquisition. David wrote many case studies for this in his book. The key point is that, if you’ve never done this before, don’t try it alone. There are minefields out there. You need professional people who know what they’re talking about there with you.

C is for Consolidate, which means Putting two businesses together. The key challenges are values and culture. For some, the value destruction that comes after a small company and big company are acquired and merged is almost like night follows day. But David does have some examples where it worked.

E is for Exit. Realising your dreams. You can start with the end in mind. A lot of entrepreneurs start off because they’ve never really though about their ‘why’ and the drive that pushes you in your endeavours.

Add then Multiply is available on Amazon UK and USA

Conclusion

Growing a business through strategic acquisitions, where the multiplier of the acquired business is less than the acquiring business, can yield substantial benefits when approached strategically. By focusing on complementary strengths, market expansion, operational efficiencies, and talent integration, the combined entity can unlock synergies that exceed the sum of individual valuations. To achieve long-term success, businesses must carefully evaluate potential acquisitions, plan for seamless integration, and maintain a clear long-term vision. By embracing this approach, companies can position themselves for accelerated growth, increased market dominance, and enhanced shareholder value.