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Advantages & Disadvantages of M&A as a Strategy for Growth

Mergers and acquisitions are one of the most feasible and popular growth strategies for companies across most industries. Because the economy and market for new businesses are constantly evolving, the need to have a strong strategy for growth is vital. Many business owners turn to an M&A strategy when they aim to reach new target audiences, expand to new areas, outperform competitors, bring in new talent, acquire emerging technologies, or implement new operational plans. 

In most cases, M&As can either be used for strategic or financial means. Strategic M&As allow business owners to create a new strategy to further their business endeavors, while financial M&As are used to generate new profits. Both can be beneficial to companies large and small, meaning they should be a part of your growth plan. 

Like any other growth strategy, using M&A has both its disadvantages and advantages. Keep reading to learn more about the costs and benefits.

Advantages of M&A

There are many advantages to using M&A as a business growth strategy. Below are a few:

Create a More Diverse Stream of Profit

To deal with the constant ebb and flow of the economy, businesses often have to diversify their streams of profit to stay afloat. This may include investing in smaller businesses that offer unique but somewhat related products or services. Sometimes, large companies may even pursue unrelated endeavors by networking with businesses in a completely separate industry. Despite this being a seemingly odd way to diversify investments, it does lower the risk of an entire business collapsing if the new merger does not work out.

Increase the Amount of Services A Business Offers

In addition to creating more diversity in a profit structure, using M&A as a growth strategy can also help companies increase the number of services they offer. For example, if a fitness company wants to invest in or partner with a nutrition business, this could open an entirely new customer pool. By creating a holistic approach to health, they could become a more well-rounded company – in turn increasing their reach and revenue.

Streamline the Development of New Ideas

Using M&A as a business growth strategy also helps to facilitate new ideas for business owners. Creating new products, technologies, or services is essential to business growth, as it helps companies stay relevant and up-to-date on trends within the economy and consumer market.

However, coming up with new ideas is not a fast process. There are many facets of research and development, resulting in a cumbersome trial and error system that can sometimes take years to complete. Reducing this timeline as much as possible is a top goal for many companies, especially those looking to expand rapidly and avoid an organic, slow-moving approach.

Disadvantages of M&A

While there are many benefits to using M&A as a growth strategy, there are some downsides.

Added Financial Strain

Like all new business endeavors, growth does not come without cost. It is necessary to invest in your business in order for it to grow, but many business owners fail to recognize the significant financial burden that comes with the M&A process. Going into debt, sometimes extremely large amounts, can cause more financial strain than a company is ready for. Unfortunately, this leads to multiple concerns like putting additional performance pressure on both lower-level staff and executives.

Delayed Integration with Current Operations

As nice as it would be to have a quick integration process, many M&A transactions can take a significant amount of time to complete once all the logistics are finalized. This is something that many companies often forget, especially if they are eager to move on to the next phase of their business. Flexibility is not a luxury that most M&A transactions afford, simply due to the fact that businesses have other investments and structures that can get in the way.

There can also be unexpected delays during the M&A transaction, such as unexpected financial concerns, differing opinions on valuation, and undiscovered assets. Being prepared for these is to avoid unnecessary headaches along the way.

Potentially Misleading Management Expectations

One of the most important things that companies need to consider when using M&A as a business growth strategy is how the merger or acquisition will impact management. If a team is already overworked or not confident in the current state of business, adding on more responsibilities will only lead to dysfunction within the company. Having a development plan in place, extra assistance for regular business tasks, and adequate financial compensation is essential during this process. A key thing to remember is that your existing business structure should never suffer as a result of a new endeavor.

How Persient Can Help

While the entire M&A process can serve different purposes for different business owners, when it is used as a growth strategy, it can prove to be extremely beneficial for companies of all sizes and across all industries. Businesses can experience challenges they may not be expecting, leading to some disadvantages of taking this approach.

A solution to navigating these advantages and disadvantages is partnering with an M&A advisor. Persient is the perfect option for businesses looking to implement a new growth strategy, but don’t want to go through the process alone. Our advisors will guide you through mergers and acquisitions, using their knowledge and expertise to secure you the most feasible deal with the least amount of headache. We work with your company to secure growth opportunities that help you succeed.

Contact us today to be set up with one of our advisors.

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