Entrepreneurs buying other businesses to grow, says new report

Increasing number of businesses for sale as entrepreneurs get older, days BDC report

Entrepreneurs who acquire other businesses do so to grow, says a report released on Tuesday by the Business Development Bank of Canada (BDC).

And Pierre Cléroux, vice-president of research and chief economist at BDC, said the issue has become important because of the increasing number of businesses for sale as entrepreneurs get older.

Pierre Cléroux
Pierre Cléroux

“For many companies the best way to grow – the best strategy – is to make an acquisition,” he said.

The study, Buying a Business: A Winning Strategy to Purchase Another Company in Canada, found that firms that acquired more than one business were 66 per cent more likely to have generated annual revenue growth of 10 per cent or more in the last three years.

“People are looking at acquiring another business because they want to grow faster,” added Cléroux. “Our research is showing that people who have made an acquisition over the last 10 years they have been growing faster than other companies in the same sector. So it’s a great way to grow faster by making an acquisition.”

The study said that the key to a successful business acquisition is a well-structured process and good planning. Entrepreneurs who undertook a well-structured acquisition were 94 per cent more likely to become high-growth businesses three years after an acquisition than firms that did not follow such a process, it explained.

Cléroux said companies are looking more at the resource sector, which includes energy (oil and gas) and mining. Acquisitions are being seen in every sector of the economy but those two sectors are more predominant.

“The economy is changing more rapidly in those sectors. The energy sector has been hit by lower prices. So probably there’s more opportunities for people who are ready to sell and people who have cash. They see it as a good opportunity for when the market is coming back they see that as a good growth opportunity,” he said.

The report found that entrepreneurs identified securing financing and negotiating price and commercial terms among the most challenging aspects of an acquisition. And 29 per cent of entrepreneurs found retaining key employees difficult. Eighteen per cent mentioned negotiating purchase price as a challenge.

“What we realized is that not everybody is well prepared. There’s a strong relationship between success and how much you’re prepared for our acquisition,” said Cléroux.

The report identifies a number of strategies that companies should use, including having an internal team in place to make sure the right people are around the table when the decision is made, having a clear objective as to why they want to make the acquisition, conducting the right due diligence, and keeping engaged the employee and the clients of that new business.

“The post merger strategy is very, very important,” said Cléroux.

“It takes four to five acquisitions before you really learn how to do it. It’s not easy to go up the learning curve. People who have more experience, they perform better. They have more success in terms of the acquisition.”

– Mario Toneguzzi


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