Online Extra: The Desire to Acquire

According to a growing number of entrepreneurs, buying another business is the fast-track route to cost-effective expansion

For many small companies, the economy's current weakness creates a golden opportunity: a chance to acquire other businesses. Prices are down, sellers are plentiful, and the urge to buy is clear: An April Conference Board survey found that 38% of small- and mid-sized companies planned an acquisition in the next five years.

Why the treasure hunt? The two most common reasons are to gain market share and broaden product lines. "This is particularly the case in mature industries where the potential for expansion is limited," says Howard Muson, who authored the Conference Board study.


  The push for acquisitions is occurring in all regions and industries. But M&A activity is hottest in the service sector where the buyers don't need much capital to cinch a deal, says Bill Womack, president of Landmark Business Brokers, which is based in Arlington, Tex. There's no shortage of sellers in this environment, either. Companies battered by tough economic conditions are on the block, while the number of Baby Boomers looking to sell out and retire grows steadily.

Companies going on shopping sprees are usually fast-growing and want to get even bigger -- in a hurry.

Case in point: CPA firm Mir, Fox & Rodriguez, which acquired startup consulting firm Knowledge Online in April for their business advisory services. "More and more, clients ask us questions about things other than finance," says Carolyn Fox, a partner in the 70-person firm. "I've been referring business out for years, and now we will be able to do all that internally, which is what our clients want."

Fox says she and her partners had been considering acquisitions for a few years but had always planned to snap up smaller accounting firms. They hadn't even considered acquiring nonaccounting firms. But then they realized that, with $4.5 million of their $5.5 million practice earned from auditing, the firm needed to offer more to their clients. "We have to have a new skill set," Fox says. Fox still plans to acquire three accounting firms -- one each in Dallas, San Antonio, and Austin -- within the next two years to build market share.

Are you ready for an acquisition? A PricewaterhouseCoopers (PwC) study of small and midsize companies says businesses that are acquiring other businesses are: Faster growing: Over the next 12 months they expect revenue growth of 28%. Highly dependent upon qualified workers. More involved in e-business: They expect to continue increasing their revenues from Internet sales. International: They make 20% of revenues by selling abroad. Planning major capital investments: Those planning acquisitions will spend 2.5 times as much on new capital investments this year as those not looking to acquire. Prepared to spend: Over the past quarter, those planning acquisitions increased their credit availability.

Whatever the state of your company, there are plenty of potential pitfalls in buying another business. In the PwC study, CEOs of small- and mid-size companies who had made unsuccessful acquisitions pointed to three factors that were most often responsible for derailing their plans: Incompatibility of top management, not doing enough homework on the acquired business, and misreading the strengths and weaknesses of their own operation.

As with any golden opportunity, the shiniest looking deal can tarnish quickly.

By Naween Mangi in New York

Edited by Fred Strasser

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