Many SME business owners may think it is too early to make an acquisition to growth their company, and focus instead purely on organic growth. In the early years of a company, this is generally a wise decision, as a strong foundation needs to be laid before a good acquisition becomes a real possibility.
Build a Strong Foundation
We suggest to our clients that they focus on building a strong foundation for future growth before looking at acquiring other businesses. In fact, acquiring a business too early and without the right foundations in place can be disastrous.
The main elements that must be in place for a company to have a good foundation include:
– A consistent history of revenue growth and profitability. This enables funding the acquisition much easier and provides a buffer of financial resilience if things do not go as planned. It also allows the entrepreneur the headroom to focus on bringing the new business in without also having to turn around a tough internal situation.
– Clearly documented processes and systems across the company. This is one of the most important drivers of management efficiency for entrepreneurial companies. Systemization provides clarity across the business and also actually provides a blueprint for how things will be changed for the acquired company once it is brought in.
– A focused team with clearly defined roles. The new team members coming with the acquisition will be looking for guidance and clarity, which most easily comes from a professional and focused team operating withing a strong environment.
– Ideally will allow growth into strategic area.
In looking at possible acquisition targets, it is crucial to find a company with good strategic and cultural fit. The acquisition should enhance the ability of your company to do things it already planned to do – but better and faster. We also council our clients to look for the same things that we recommend for them – a history of good performance; systemization across the business and a strong team.
Its important to ensure that the business you purchase is ready to be bought – that it runs itself, has recurring revenue, standardized systems and a good team. At Entrepreneur Purpose we use a 15 step readiness index to guide all of our clients either buying or selling businesses. For a small business acquisition, acquiring a business that is not ready can take too much work and potentially derail your business owing to the time required to fix the acquired business.
Equally, culture and way of doing business needs to align. Buying a company that has a very different way of doing things or culture can be demanding and end up leading to replacing a lot of staff members. Resentment builds on both sides of the divide after acquisition and that brings further, sometimes hidden, costs.
Quattro Coffee Roasters
We recently worked with one of our entrepreneurial clients that built on its strong business foundation and has all the signs of successfully leading to greater growth.
Gareth Pike started specialist high-quality coffee roaster Quattro Coffee Roasters in 2019. The company has consistently grown, almost doubling revenue each year. The company roasts its own beans, which are in the top 1 per cent of arabica beans in terms of quality. They supply to a range of customers including leading retail coffee shops, hotels and, more recently, some national partners. Gareth is very selective about his clients to ensure stability of relationship and quality of product.
Quattro Coffee Roasters is is well managed, with clear processes across the business and an excellent team. Quattro Coffees is also a purpose-based business that has a strong, values driven, ethos and contributes to charitable causes. The company has a clear purpose that guides all that they do:
Quattro Coffees was born out of the pursuit to create the perfect coffee, to be enjoyed by customers visiting specialist coffee houses. We aim to partner with people that have an equal passion for serving the very best.
After building his initial business amongst coffee retailers, Gareth was able to secure his first contract with a national level client, that significantly built his business. Other similar clients building on this success. He has been very strategic in building a stable and growing business. This is despite being in one of the most competitive markets in Australia – there are numerous coffee roasters in Sydney, including close by on the Northern Beaches of Sydney where Gareth is based.
Gareth recently completed the acquisition of a larger coffee wholesaler that will enable it to achieve its long-term aims more quickly and likely at lower cost. The acquired company has double the roasting capacity, a strong customer base, and allows Quattro to fulfill its strategic plan in terms of capacity.
The acquisition went smoothly owing to the strength of Quattro’s management and systems, and the due diligence done prior to the transaction. It will take some time to fully bed-down, but Quattro Coffees now has a platform for stronger growth on a larger canvas. Without its commitment to excellence and strong management disciplines, this opportunity would not have been possible.
A strategic acquisition can be a powerful growth driver for SME businesses – but it is essential to have the right foundation in place and also choose the right company to acquire. For smaller companies, doing the wrong acquisition can have substantial costs. But when done right, a good acquisition can accelerate your strategic plan and substantially increase enterprise value.
Key Takeways
- Acquisitions for early-stage companies can be highly accretive to their growth, but must be built on the strong foundation of proven business model with growing revenues and profits; a well-managed and systemized business; with a great team and clarity of roles.
- Companies that can help build to strategic goals and with complementary cultures can be worth considering.
- Acquiring the wrong company can be one of the most costly and time consuming errors that can be made.
- When executed well, the right acquisition can enable you to achieve your strategic goals more quickly and result in a larger and more stable business.
Entrepreneur Purpose assists entrepreneurial companies plan strategically and systemize their business. We assist our clients prepare for growth and scale, including business acquisitions or sale. Our experienced advisors assist our clients distil purpose, and then embed it such that purpose, mission and values become shared by all team members. Contact us for a complimentary introductory discussion.
