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When buying a business can turn sour

Acquisition of a business can add numbers to your bottom line but without an organic growth strategy the benefits can quickly turn into problems, warns business consultant Brett Davidson

The option for growth by acquisition, as your firm matures and your processes become embedded is an enticing one. Why wouldn’t you try to increase growth by buying a business or a client bank to bolster your recurring revenue, and to open up new revenue generating opportunities on those acquired clients through your financial planning process?

Although there are many issues to be evaluated when it comes to acquisition, you need to remember not to take your eye off organic growth and the inputs that will see it continue. Assuming the clients you buy are a good fit, you’ve paid a fair price, and the transfer of information and relationships goes according to plan, you should be in good shape.

If you’re a firm that already generates new leads and new work from its existing clients and introducers, the acquisition strategy simply adds to what is already working in your business. However if these organic growth levers are not being leveraged hard enough before you make the acquisitions, you may be covering up a much deeper problem.

Adding clients and cashflow looks great in the short term, but if this is all you do, you may find that three years later you have a more complex business to manage. Your cost base may be higher than you originally anticipated, there are added training and development requirements for your staff, and there may be a stagnation in your business development. You might argue that stagnation at £1.5m of turnover is better than stagnation at £500k turnover, but I would disagree.

Businesses are either going forward or going backwards. Hitting a plateau at any level of turnover has some negative implications, including:

• Costs that seem to rise faster than inflation year after year

• Finding and securing new talent into your business is expensive, and the war for future talent is only just beginning

• Aggressive restructuring (i.e. sacking people) is not something most small business owners are either skilled at or keen to do

• Purchasing a new business inevitably brings some clients who are non-target and letting these people go is also not a core skill for most owners (potentially creating more long tail clients to administer)

• Trying to kick start organic growth after years of neglecting this skill can prove exceedingly challenging, when combined with the pressure generated from the points above.

What to do

First and foremost, it’s important to develop and retain an ability to generate organic growth from your existing clients. If you’re not generating a regular and consistent flow of leads from your clients, you probably don’t have your service proposition right. Good clients stay with you year after year. Ecstatic and engaged clients also stay, but refer friends and colleagues whenever the opportunity presents itself. How do you intend to make your existing clients ecstatic and engaged?

In my view, this is something that should be embedded and working before you embark on the acquisition trail. The firms I know who’ve had success with acquisition have all ensured this was the case. If your business doesn’t possess these skills and processes now, it is unlikely to develop them in the midst of a flurry of acquisition activity, so make sure you’ve got these areas covered before you contemplate acquisition.

As my colleagues at Business Health have identified in their global CatScan research, there is a direct link between the number of client touches per year and client referral rates. But the touches need to be of high quality, not just frequent and annoying. It’s also important that you’re actually addressing your clients’ highest order needs.

The benefits

Growth by acquisition can be a fantastic way to grow and develop an established business rapidly, but don’t forget to retain and develop your organic growth skills as a business. Not only does this protect you in the future when the acquisition strategy reaches a natural conclusion, but every purchase you make can be turned into an even greater asset. Having the confidence in the ability of your business to extract even more value from the purchase than your rivals equates to better business performance. It may even allow you, if necessary, to pay a little more than a competitor in a close bidding situation for a really first class acquisition.

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