Recently, I had the opportunity to meet a business employing 58 people, growing at a steady 18% annual compound growth rate. Given the smooth ride they enjoyed in achieving it, I asked why only 18%? Why not double it?
They confessed that they sought to accelerate this growth rate through an acquisition they were mulling over. The target was a smaller business in the same industry.
Whilst growth through acquisition has its place, it’s equally fraught. Globally, the stats suggest that around 86% of acquisitions fail to deliver the promised value. There are a host of reasons. I’ll share the few that changed their minds.
Paying too much
Once the acquiring leadership team gets excited about its potential, they will overvalue it. If the company being acquired can successfully feed the buyer’s imagination, they tend to become increasingly convinced that the acquisition will be a silver bullet that would double up their company value in a couple of years. Great for the company being acquired, but a few months into the acquisition, the buyers are usually less thrilled.
Mismatched customer base
Defining the business you are in should be about defining who your customer segments are, what problems your product or services solves for them, understanding how that problem comes about and the cost of that problem not being solved, and finally, understanding how that customer segment goes about solving that problem. It’s not uncomplicated!
For example, the company I met with recently refers to their customer segment as “SMEs”. The last time I looked, the companies that make up SMEs are widely, profoundly and deeply complex. Be it industry, size, age and capability of the owners, location, business model, sector trends and many other variables. A lazy or superficial definition of the customer segments you serve will create a torturous marketing and service fulfilment outcome that keeps you tightly knit in the daily-weekly-monthly operational activites of your business and collapse your productivity. Misaligned or misunderstood customer segments in acquisitions compound this trauma tenfold.
Cultural clashes
People are the heart of any business, and most stay at a company because of its culture. It is the glue that holds things together, especially in smaller businesses. How do you come to understand a company’s culture? If you rely on the values presented on the website or stencilled on the reception wall, you might find yourself in hot water. When two bodies of water with widely differing temperatures come together, they catalyse a thermocline, repelling each other. Mismatched cultures infamously poison the wellspring of most acquisitions.
Given the nature of this steadily growing business and its large span of control, which already had leadership too involved in operational activity, we opted to take another approach to double growth.
In 3 months, we created two management roles to release the time of the CEO to become an actual CEO rather than a general manager, the commercial director to become an actual commercial director instead of an operations manager and the head of business development to move out of operational sales into building a team. Today, we have ‘locked and loaded’ the company to eat their competitor’s lunch rather than buying it for them. Let doubling up growth begin!
