Author: Khurrum Khan, MBA, is a leader of BDC’s mid – large business team in Meadowvale, Mississauga
Entrepreneurs are increasingly turning to acquisition as a growth strategy amid the booming M&A market.
Business acquisitions have rebounded strongly since the lockdown in 2020 and are poised for more growth. As more aging entrepreneurs seek retirement, nearly 120,000 Canadian businesses are expected to come up for sale outside the family or management within five years, according to a recent BDC study.
Low interest rates and strong liquidity are helping to fuel acquisitions. Since the pandemic, companies are increasingly eyeing acquisitions as a way to access new technology and gain employees amid labour shortages. M&A volume has especially jumped in sectors that benefitted from the pandemic, such as health care and IT.
Acquisition Pays Off
Acquisition is a growth strategy that clearly pays off. Companies that grow through acquisition are two times more likely to have above-average sales growth than firms growing organically, according to BDC research. Companies also reported increased profitability and market share and reduced costs.
But acquisition can come with challenges. It’s common for the transition to be rocky and for target companies to underperform expectations.
At BDC, we’ve given hundreds of entrepreneurs advice and financing to facilitate business acquisitions. We’ve found that a few essential steps make success more likely.
Plan Ahead of Time
It’s crucial to do some planning beforehand. An acquisition shouldn’t be opportunistic. It should be part of a well-thought-out plan that defines objectives for your company and characteristics of the target business.
You should also assemble a team of key employees and advisors (legal, accounting, M&A experts) to help guide the process.
When short-listing potential targets, scrutinize how they meet your requirements. Be sure to get to know the companies directly. Some buyers make the mistake of just looking at numbers and never talking directly to sellers. As a result, they miss out on important information.
Talk with Lenders Early
Don’t skimp on a thorough due diligence. Study not only finances and legal aspects, but also market positioning and employee retention. High turnover may signal a lack of team engagement and could foretell departures after the acquisition.
It’s also important to start the conversation early with lenders to find appropriate financing. Look at more than just the interest rate. Flexble repayment terms are also key to ensure you retain enough cash to cover transition costs and inevitable surprises. Buyers often underestimate how much money they’ll need.
An acquisition can be an excellent part of your growth strategy. Being well prepared helps ensure you obtain all the benefits.
Visit bdc.ca for expert advice, tailored financing and free resources on executing a successful business acquisition.