The Disadvantages of a Business Acquisition
One way to grow your business is to buy other businesses. The idea is to increase your revenues by acquiring a functioning company that will contribute to your income. However, acquisitions can present some difficulties and actually put you at a disadvantage. Consider the pitfalls before you pursue an acquisition.
Even a company has a personality, a culture that permeates the entire organization. If you acquire a company that has a way of doing things that conflicts with yours, the employees of the acquired company may bristle at your management style. Conversely, your employees may not accept managers and supervisors from the acquired company. You can try to keep the two companies completely separate, but in such a case the two organizations will have to communicate, so the culture clash can still cause problems. For example, if your culture is based on the idea of meeting deadlines and the acquired company has a more relaxed view of delivering work or products on time, you may find yourself disciplining the management of the acquired company.
When you acquire a company, you may have employees who duplicate each other's functions. This can cause excessive payroll expenditures where you pay for two employees to do the work of one. That can reduce motivation among employees. If you get rid of excess employees, you may cause resentment among the workforce. The decreased morale can reduce productivity. For example, laying off excess production staff may cause remaining production personnel to fear they will lose their jobs. The resulting stress may distract them from the work at hand.
The acquired company may have different objectives than yours. In fact, this is likely, because the two companies have been operating independently up until the acquisition. For example, your original company may embrace the objective of expanding in to new markets, while the acquired company may be in pullback mode, with the objective of reducing costs. The resistance you meet as you try to spend on marketing initiatives can undermine your efforts.
If you borrow money to acquire a company, that debt goes on the books of the original company. In order to service that debt, you need revenues from the acquired company. Since many companies become the target of acquisitions because they are struggling financially, you may find that the financial problems of the acquired company prevent you from generating the income you need to pay the new debt. In addition, acquired companies tend to have their own debt, which you assume when you buy them. The growing debt may outpace new revenues.
If you acquire a company that is in the same line of business as your original company, your hopes for market expansion may hit a barrier: the two companies together already dominate the market. You may find it difficult to grow sales after the acquisition because not enough new customers exist outside of the customer base you and the acquired company have established.