An acquisition is the purchase of an entire company, or a part of a company. There are advantages of acquisition and there are certain disadvantages of acquisition.
Advantage of Acquisition
Acquiring an existing business has many advantages for entrepreneurs, as shown below:
Businesses with an established image and track record are a significant advantage of acquiring existing businesses. The entrepreneur need only continue the current strategy in order to be successful with the existing customer base of the firm if it has been profitable.
As far as location is concerned, when you acquire an existing business you won’t have any question as to whether the new clients will be familiar with the location since they already know it.
Marketing Structure: An acquired firm’s established channel and sales structure will determine the value of the business. An entrepreneur’s network of suppliers, wholesalers, retailers, and manufacturers’ representatives is critical. The entrepreneur can focus on improving or expanding the acquired business once this structure is in place.
Purchasing a business can actually be cheaper than expanding in other ways.
Investing in the existing employees of a company can be a great way to acquire it. Having a manager who knows how to run a business is crucial to its long-term success. When a new owner takes over the business, they can reassure the business’s customers, suppliers, and channel members.
The entrepreneur has more time to spend assessing opportunities to expand or strengthen their existing business, since they do not have to worry about finding suppliers, channel members, hiring new employees, or creating customer awareness.
Disadvantage of Acquisition
Although acquiring an existing business has many advantages, there are also disadvantages. It is important to weigh carefully each of the advantages and disadvantages of each expansion option.
Generally, ventures for sale do not have a consistent track record of success, or even have one that is marginally profitable. Reviewing the records and meeting with important constituents is crucial for assessing the potential of the marginal record. Likewise, if the layout of the store is bad, this factor can be corrected, but if the location is poor, the entrepreneur might be better off using some other expansion strategy.
Entrepreneurs often think they can succeed where others have failed due to overconfidence in their abilities. This is why a self-evaluation is so important before entering into any purchase agreement. Even though the entrepreneur brings new ideas and management qualities, the venture may never be successful for reasons that are not possible to correct.
Key Employee Loss: Often when a business changes hands, key employees also leave. Key employee loss can be devastating to an entrepreneur who is acquiring a business since the value of the business is often a reflection of the efforts of the employees.
This is particularly evident in a service business, where it is difficult to separate the actual service from the person who performs it. In the acquisition negotiations, it is helpful for the entrepreneur to speak to all employees individually to get some assurance of their intentions as well as to inform them of how important they will be to the future of the business. Incentives can sometimes be used to ensure that they employees will remain with the business.
Over evaluated: It is possible that the actual purchase price is inflated due to the established image, customer base, channel members, or suppliers. If the entrepreneur has to pay too much for a business, it is possible that the return on investment will be unacceptable. It is important to look at the investment required in purchasing a business and at the potential profit and establish a reasonable payback to justify the investment.
After balancing the pros and cons of the acquisition, the entrepreneur needs to determine a fair price for the business.