More than half of fast-growing private companies say joint ventures, strategic alliances, and acquisitions are critical in order to grow business and move into new markets, according to a new survey released by PricewaterhouseCoopers.
However, close to a majority of the 339 respondents also said they will not look to engage in any acquisition or merger activity in the foreseeable future, citing concerns over costs, lack of attractive business targets, and unsuccessful post-merger integration. The survey, released on Tuesday, polled CEOs of privately held companies with annual revenue ranging from $5 million to $150 million.
While M&A or strategic alliances may be an attractive growth strategy for certain businesses, smaller companies have to deal with the complexities and costs of integration, as well as managing their day-to-day business.
"Small-business acquisition deals are every bit as complicated as large deals," said Fentress Seagroves, transaction services leader in PricewaterhouseCoopers' private company services practice. As a result, smaller companies have to be willing to invest the time and money into a successful acquisition.
"Owners of smaller businesses need to understand valuation, due diligence, and whether or not the target is a good strategic fit with their overall business strategy," Seagroves said. "They should take the time to invest and plan for integration, as well as post integration." According to Seagroves, smaller businesses can look to alliances, joint ventures, and licensing as a way to grow their businesses as an alternative to a full scale acquisition.
In the survey, 63% of companies said that extending their customer base is the main reason they would consider a merger or acquisition of a new business. Thirty-seven percent said they would use a merger or acquisition for expansion into new markets. Other advantages included shared costs, geographic expansion, and as an alternative to internal research and development.
Alliances or joint ventures were the most popular among survey participants who engaged in transactions with other companies. Close to half of the respondents participated in roughly five alliances over the past three years, 27% of the respondents merged or acquired two companies, and 25% were involved in licensing or co-marketing arrangements with other companies.
However, 49% of all respondents said they will not look to acquire or merge with another company because they are happy with their current internal growth strategy. Nearly 30% said they fear "biting off more than they can chew," while 24% cite a lack of attractive companies.
"The market is very expensive right now," Seagroves said. "There is a lot of private equity chasing after smaller businesses therefore the price for the deals goes up."
Whatever the method for expansion or growth, small businesses must be diligent in their evaluation process to make sure the target, partner, or licensing agreement can specifically enhance their core business, according to Seagroves.
"Companies often make mistakes when they try to force an acquisition," Seagroves said. "They may try to absorb pieces that aren't a good fit with their company while looking for a certain synergy."