Should You Grow Your Business by Buying Another?

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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If you’re determined to expand your sales this year, you’ve probably brainstormed creative ways to achieve your goal. Ideas like breaking into new territories, adding to your products or services, or expanding your team so you can serve more of your market are probably on that list.

But you may not have not considered a powerful way to potentially do all three of these things at once: buying another business that complements your own.

“There’s no question that acquisitions are an appropriate part of anybody’s growth strategy,” says Leonard A. Schlesinger, president of Babson College and an author of Action Trumps Everything. Of course, he adds, you need to do a lot of homework to determine if buying a business is right for you.

The timing may be right. Many businesses are attractively priced right now although valuations have been rising recently. Some owners who don’t have their businesses on the market but have been waiting for a good time to exit are likely to welcome your interest now. Dow Jones VentureSource reported that M&A deals involving venture-backed companies dipped by 22% in the first quarter of 2011, compared to the same quarter last year, following a year-end pickup in deals in the fourth quarter of 2010.

How do you know if an acquisition is the best way to grow your business? Here are some factors to consider.

Do you have the time to do the legwork?

Identifying potential businesses to buy — and evaluating them to see if they’re a good fit — can take months of careful research, even if a business broker is helping you. “Often times, it takes a skill set way beyond the one that someone uses to manage an enterprise on a daily basis,” Schlesinger says.

Does it make sense from a financial and strategic standpoint?

You may need outside professional help to evaluate candidates, unless you’ve already done acquisitions. “I think it is very useful to gain access to an advisor to help you think through the issues, so you come at them with logic and a plan,” says Schlesinger.

Do you have adequate cash in reserve?

You’ll need a fair amount more than what it’ll cost you to buy the business. Professional services fees can mount if the deal is complex. “You’re going to bring in lawyers to manage the transaction,” says Schlesinger. “You’re going to bring in accountants to manage the consolidation.”

Will your cultures mesh?

“The biggest issue is: Do the two organizations fit together?” says Schlesinger. “More often than not, the failures are failures of human resources and cultural mis-fit.”

Are you prepared for the unexpected?

When it comes to value creation through acquisition, “there are far more examples of disappointments than sterling success,” says Schlesinger. “In more cases than not, one plus one equals one and a half.”

That doesn’t mean you shouldn’t attempt to buy another company. Just make sure you’re prepared. To get up to speed quickly on best practices, Schlesinger — who was formerly chief operating officer of Limited Brands — recommends reading up on how Cisco has handled its numerous acquisitions. “They have the acquisition process down to a T,” he says. “They’ve decided it’s an essential part of their growth strategy.”