We’ve got the opportunity to buy another business, should we take it?

Acquisitions slip in and out of fashion. There are periods when “do an acquisition” has been on the agenda of almost every strategic planning day I have facilitated, whereas at other times it has barely raised its head.

Now doesn’t seem to be a particularly fashionable time for acquisition-as-a-strategy but it’s opposite, acquisition-as-an-opportunity-out-of-the-blue, is certainly increasing.

A great example is a business I met with last week, which I will call Grosvenor. Grosvenor had absolutely not been looking to acquire a business, in fact it hadn’t never even thought about it.

That changed when they were approached by an intermediary and asked if they would be interested in buying a particular business (at a “good” price of course!).

All of a sudden the management team were gripped with excitement. Here was an opportunity to double the size of their business. Anticipating that they would, personally, become bigger fishes in a bigger pond, it’s fair to say they got carried away.

John, the CEO was mulling over the proposition. Knowing that acquisitions take up a lot of management time and are renowned for causing businesses to take their eye off the main game, he wanted to be sure that, never mind the “good price”, the acquisition was a good idea in principle.

To start checking this he asked the management team this simple question “Why would Grosvenor do an acquisition?”

The answers ranged from the vague and woolly to “to get more market share” and ” to achieve economies of scale by being bigger”.

John stopped there because bigger never automatically means better, especially not in terms of profitability. It’s safe to say that in the majority of acquisitions economies of scale savings are vastly over estimated, as are the gains to be had from an increase in market share. On the other hand of course, the cost to the business of the turmoil of an acquisition is usually woefully underestimated.

As John noted, the only good reason to do an acquisition is if it accelerates your ability to do something. Upfront you need to have a very clear plan of what you want to achieve for the business (your strategy!). Only when you have can you look at an opportunistic acquisition and say, “does it make sense?”

Julia Bickerstaff’s expertise is in helping businesses grow profitably. She runs two businesses: Butterfly Coaching, a small advisory firm with a unique approach to assisting SMEs with profitable growth; and The Business Bakery, which helps kitchen table tycoons build their best businesses. Julia is the author of “How to Bake a Business”  and was previously a partner at Deloitte. She is a chartered accountant and has a degree in economics from The London School of Economics (London University).