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Reasons Strategic Buyers Make Acquisitions; By Stephen Goldberg Managing Partner of Sun Mergers & Acquisitions and Sun Business Valuations.

What Drives Strategic Acquisitions?

In order to maximize your company's value as an acquisition candidate, it is invaluable to understand the primary motivating factors that drive strategic acquisitions. This will help position your firm by making it more appealing to an acquirer for reasons beyond the numbers on the financial statements.

When representing a client, we use the factors below to guide us toward companies that would be the optimal acquirers and recognize the most value. It is critical to determine which companies and industries would benefit from an acquisition by achieving synergistic benefits. The following are primary synergies that tend to drive strategic acquisition:

Increase Sales & Revenue

Cross-selling capabilities. Captive clientele of both companies can be capitalized on, as each company can distribute additional products through the other's established channel of distribution.

Immediate growth goals. Growth through acquisition enables more rapid expansion, especially in our current environment whereby it is challenging to grow organically.

Increase size and critical mass to become more viable relative to future acquisitions. A larger company typically attracts more suitors at higher purchase price multiples.

Improve Profitability

Vertically integration. Vertical integration enables a company to increase control over product quality and service as well as reduce costs.

Consolidation of overlapping/redundant overhead and other expenses. These expenses can include rent, labor, insurance and other back office functions. This expense consolidation can have a huge impact on profitability.

Economies of scale. Increase purchasing power through economies of scale and gaining more importance and leverage with vendors.

Diversifying and Reducing Business Risk

Reduction of dependencies. An acquisition can address product, customer or market dependencies and promote diversification.

Introduction of additional capabilities. Customers will benefit from one-stop-shopping and vendor consolidation.

Smooth out cyclical sales trends. Address seasonal cash flow issues by acquiring a company that has alternate seasonal revenue cycles. This also enables improved employee utilization.

Create Competitive Advantages

Elimination of a competitor. The addition of new product and service lines can differentiate the organization from that of competitors. The increased market share gained through the addition of new capabilities can propel a business ahead of competition.

Join forces with the competition. Foster collaboration on R&D, engineering, product development and marketing efforts.

Expand current footprint. An acquirer can gain presence and a base of operations in an expanded market area. Certain new markets may be difficult to penetrate without an acquisition.

Reputation & market awareness development. Leverage a strong reputation into other product categories or market territories.

Access to an experienced labor pool. Immediate access to qualified personnel and valuable expertise, especially in those industries in which qualified labor is scarce.

Copyright Sun Mergers & Acquisitions and Sun Business Valuations

About the Author: Stephen Goldberg is the Managing Partner of Sun Mergers & Acquisitions and Sun Business Valuations, specializing in the sale, merger, and valuation of privately held small and mid-market companies. Sun M&A represents business owners of entrepreneurial companies that are considering an exit strategy through the sale or merger of their firms. Stephen has been specializing in this arena since 1985 and has participated in more than 200 closed transactions.

Sun Mergers & Acquisitions

411 Route 17 South

Hasbrouck Heights, NJ 07604

Phone: 201-727-1300

Fax: 201-727-1350


Twitter: @sunmergers
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Publication:Business Appraisers
Date:Jan 9, 2011
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