Beauty of Small Acquisitions
Windows into New Growth Areas
small acquisition is an excellent way to gain a foothold in a niche
market. You can gain new capabilities, new customers and new talent.
You then concentrate your efforts to build the business to be a major
player in that market niche.
The market opportunity for small
acquisitions is substantial. Many small companies need to be part of
larger companies in order to grow and to gain economies of scale in
marketing and sales. Small acquisitions are less expensive,
simpler to transact and easier to integrate. Plus, the search for small
acquisitions can be a resourceful window into new growth areas.
is a small acquisition? A "small acquisition" is an acquisition of $5
million, maybe $10 or $15 million, but less than $20 million in
The search for small acquisitions can create
shareholder value in several ways—identifying new areas for growth,
acquiring new capabilities and technologies, as well helping transform
a company's business model.
Identify New Growth
opportunities for growth often lie outside the confines of your current
industry description. Where should you look for small acquisitions? The
most fertile ground is in adjacent markets—at the periphery of your
market space. These gray edges of your market are where the new niches
Technology, New Capabilities
of a small acquisition as a type of outsourced R&D.
technologies are discovered in small companies. Big companies generally
don't develop the breakthrough technologies. More importantly, however,
is the application of the new technology—using it to solve a customer's
problem. This is where small companies excel.
successful companies are continuously refining their business models.
Small acquisitions are an excellent way to redefine or adjust your
business model. For example, you can gradually shift the composition of
revenue to include more recurring revenues.
Build it Your Way
smart play is to make a small acquisition, get a foothold in a niche
market and then build upon it. Small companies are much more malleable,
easier to grow the way you want to. They are not cast in concrete. For
example, you can change pricing structures before the industry gets
used to one certain way. You can establish the service and support
standards. You are not inheriting a situation that you can't easily
All large markets were small markets at one time. This
buy and build strategy may involve more work but it requires less
capital and you have more flexibility regarding how you choose to grow
Easier to Transact
acquisitions are easier to transact. The deal structure is a lot less
complicated. These deals are often structured as a purchase of selected
assets, not as a purchase of stock. Since the stock is not being
acquired, there is less concern about off balance sheet liabilities,
thus reducing the due diligence burden.
There are fewer
integration issues. Why? Because there are simply fewer things to worry
about. The company may be small enough that it doesn't have a "culture"
of its own to be dealt with.
opportunity is that many small companies need to be acquired in order
to grow and thrive. Why do they need to be acquired? Because they have
limited cash and limited capabilities in sales and marketing. Many are
one-product companies that have no economies of scale. They need to
team up with a larger company that has greater resources and
established distribution channels.
Plus, there are many more
small companies (in the $5 million to $15 million range) than there are
larger companies that need to be acquired.
Small companies are
under the radar because they are not "For Sale." They are plugging
along, growing steadily. They are not out looking to be acquired. The
good news is that the market for small acquisitions has not been picked
over. The bad news is that these companies will not come knocking on
your door. To identify these opportunities, buyers must actively seek
Few Buyers are
second reason that underscores the opportunity is that not many buyers
are actively seeking small acquisitions. The large industry buyers and
the financial buyers (buyout funds) want acquisitions of a minimum
size, usually revenues greater than $50 million and EBIT greater than
$5 million or $10 million.
Large investment banks do not seek small
acquisitions for their clients because they typically do not work on
deals under $10 million. Their business model will not support it.
best buyers for small acquisitions are companies with revenues of $25
million to $125 million. However, these firms are usually too busy
running their businesses to spend time looking for acquisitions. They
are also resource constrained and don't have any extra manpower to
devote to an acquisition search.
Why Would a Small
of all, not every small company wants to be acquired. Entrepreneurs
like being their own bosses. However, some are frustrated by their lack
of market penetration, weak distribution channels, or limited sales and
marketing capabilities. Competition will only get tougher as the market
matures. They realize that they could build the company faster, make a
bigger impact, if they were part of a larger firm. They can take
advantage of the acquirer's distribution channels and leverage its
sales and marketing capabilities to make inroads in the market that
they could never do on their own.
For many entrepreneurs,
selling substantially reduces their personal financial risk. Their
personal portfolio of assets becomes more diversified.
Window into New
small acquisition search can provide an innovative window into new
growth areas, to new markets. It is a type of market research. Even if
you do not make an acquisition, the search process can give good
insight to new niche markets.
Small technology companies are
solving some kind problem for their customers. What problem is being
solved? What need is being met? Should your firm be addressing it?
usually prefer purchasing products and services from larger suppliers
who are more stable with better service and support. The fact that
small firms are in business means that the bigger companies are not
addressing the problem or their solution is too expensive. In either
case, an opportunity exists that the small company is addressing.
may choose not to make the acquisition for one reason or another.
However, you might decide to enter that market sector on your own. At a
minimum, the acquisition search effort has opened your eyes to a new
What about Large
have been pilloried in the press in the last few years for not creating
shareholder value. However, these are almost always large
acquisitions—$50 million, $100 million, or even a billion dollars.
Small acquisitions are a different ball game. Small acquisitions have a
much better record of creating shareholder value.
acquisitions can add significant value and achieve scale rapidly. The
problem is that there are not as many opportunities to choose from.
Financial buyers and industry buyers compete aggressively for large
acquisitions. The market may be picked over. Big deals are much more
expensive—not just in absolute terms but higher priced per dollar of
earnings or revenue. Plus, large acquisitions can have substantial
Two types of searches can be employed to identify small
acquisitions—strategic and opportunistic.
a strategic search you know exactly what capabilities you seek. The
goal of the strategic search is to drill down in these markets to
identify candidates that fit your criteria. The search is a systematic
and well organized effort to identify, research, screen and contact all
the companies in a particular technology sector or market. For example,
you may have identified a specific service capability that you would
like to offer. You search the tangential markets to determine if any
companies have that capability and are willing to be acquired.
opportunistic search works the other way—you identify a company that
may be open to being acquired and then ask yourself if that is an area
that you would like to address. The purpose of the opportunistic search
is to “push the envelope” and look at deals that are not directly in
your market, to expand your horizons and seek out companies that you
would not normally consider.
These opportunities are not on your
radar screen. They may be in tangential markets or even one step
removed. Criteria play a very minor role. In fact, specific criteria
can actually constrain the search process. These acquisition ideas may
be creative or unusual. In addition to actually making an acquisition,
reviewing opportunistic ideas can stimulate your thinking process and
aid in revitalizing your strategic plan.
acquisitions do have one problem—there are many companies to consider.
The endeavor simply involves a lot of work. The process of researching,
screening, and communicating with many small companies takes a
significant amount of time. The best way to handle that problem is to
outsource the search to an experienced M&A firm that will give
committed attention on small acquisitions.