The Challenges and Benefits of Acquiring Smaller Companies

Introduction:

Acquiring smaller companies has become a widely used strategy for organizations to expand their market presence and increase their competitiveness. While high-profile acquisitions often grab headlines, acquisitions of smaller companies are much more common and, in many cases, more successful. In this post, we will explore some of the challenges and benefits associated with acquiring smaller companies and shed light on why big companies pursue such deals. For a more in-depth conversation and Q&A session on the topic, register for our upcoming webinar, Preserving the Spark: Realizing Value When Acquiring Smaller Companies.

Why does a company “buy small” and acquire smaller companies?

Acquiring smaller companies can bring several strategic advantages to corporations. A few reasons why companies opt for such deals:

  1. Market Expansion: Acquiring smaller companies enables big corporations to quickly penetrate new markets or niche segments. Instead of starting from scratch, they can leverage the existing customer base and distribution channels of the acquired company to establish a presence in previously untapped areas.
  2. Innovation and Talent: Small companies often possess innovative technologies, intellectual property, or specialized knowledge that can complement a big company’s existing offerings. Acquiring these firms allows the larger company to gain access to new ideas, talent, and expertise, fostering innovation and driving growth.
  3. Competitive Advantage: Acquiring smaller competitors can help big companies consolidate their market share and increase their competitive advantage. By eliminating or absorbing potential rivals, they can strengthen their position and enjoy economies of scale.

Common features of smaller deals

Acquiring smaller companies, especially those lacking in corporate development experience or resources, presents unique challenges and considerations for the acquirer. Some items you should consider when working with less-sophisticated sellers include:

  1. Resource Allocation: Small deals at large companies often face resource constraints in terms of time, personnel, and financial investments. Since these acquisitions may be relatively minor compared to larger transactions, they may not receive the same level of attention and resources necessary for a smooth transition. This can lead to integration challenges and result in the loss of personnel and potential loss of deal value.
  2. Cultural Integration: Smaller companies often have their own distinct culture and way of operating. Integrating their employees and practices into a larger organization can be a delicate process. Without adequate attention and support, clashes in culture and working styles may arise, causing disruptions and impacting the success of the acquisition.
  3. Trickier Due Diligence: Smaller companies may not have the same level of sophistication in terms of financial reporting, governance, or compliance as larger organizations. Conducting thorough due diligence becomes crucial to identify any risks, potential liabilities, or undisclosed issues that could impact the deal’s value or integration process.

Benefits of overcoming these challenges

While acquiring smaller companies may present the challenges above, successfully navigating these obstacles can unlock significant benefits for both the acquiring company and the acquired firm. Some benefits include:

  1. Agility and Innovation: Small companies often have a nimble and entrepreneurial spirit that can infuse a larger organization with fresh ideas, innovation, and new perspectives. This injection of agility and creativity can drive long-term growth and market relevance.
  2. Flexibility and Adaptability: The integration of smaller companies can enhance a big company’s ability to adapt to market changes and evolving customer demands. Smaller entities often have greater flexibility and can respond swiftly to market shifts, helping the larger organization remain competitive and stay ahead of the curve.
  3. Long-term Synergies: The successful integration of a smaller company may result in synergies that generate long-term value. By leveraging complementary resources, technology, talent, and customer bases, big companies can achieve cost savings, operational efficiencies, and revenue growth.

Conclusion

Acquiring smaller companies can be an effective growth strategy for large corporations. While challenges exist — including those related to resource allocation and cultural integration — overcoming these obstacles can lead to significant benefits. By recognizing the potential value and diligently managing the integration process, big companies can harness the innovation, agility, and market opportunities that smaller companies offer, ultimately fueling the acquirer’s long-term success. 

To find out more about how to ensure your organization captures the projected deal value when acquiring smaller companies, rather than destroying it, join us for a best practice webinar on June 13, 2023.  Galina Wolinetz (Managing Director of Virtas Partners) will share her experience working first-hand with acquiring teams that carry out these integrations, address the common challenges, and provide practical solutions for mitigating risk.

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