Factors That Makes an Acquisition Successful
There may not be a set formula, but there are certain factors attributed to what makes an acquisition successful. Each business is unique, but they might share some distinguishing qualities that no doubt was one of the many reasons behind its success.
Let’s look at some of these factors now:
- Buying Needed Technology at A Lower Cost
Another common success denominator is when companies purchase other companies that have the technology they need. They do this because they need that technology to enhance their existing products. They know it is easier to buy an existing product rather than start from scratch. When this happens, the acquisition is deemed successful when the technology can be used to generate further profit.
- Enhancing the Company’s Performance Value
What better way to generate interest in the company than to increase its performance value. An acquisition is deemed successful when you can buy the company at a significantly lower cost. Once that’s done, you dramatically increase its profit margins and cash flow. Low purchase, high profit. Private-equity firms tend to favour this approach. A company with low margins and return on capital investment is easier option to turn around.
- Removing Excess Through Consolidation
It is common for mature industries to develop an excess in capacity over time. When supply is more than demand, the easier option becomes consolidation. One of the factors that lead to a successful acquisition is when excess capacity is removed and other competitors in the industry benefit simultaneously.
- Backing the Winning Team Early
Another factor that leads to successful acquisitions is when business picks the winning team early. Before the new product line becomes mainstream and before other competitors realize a company’s true value. For this approach to be successful, however, certain factors must be considered. One, you must be willing to take risks (sometimes big risks) early on. Second, you need to be prepared for the possibility of failure. Finally, you must be patient enough to nurture your new acquisition until it blossoms.
This article was first published on 3E Accounting. Information is correct at the time of publication.