Deciding an Acquisition Is Too Good to Be True
A small company sold a line of consumer products that commanded attractive margins. The business was growing although still reflecting the ups and downs of the consumer marketplace. Finding adequate amounts of working capital so the business could continue to grow was a big problem. At the same time, a smaller competitor offered to sell its business on very attractive terms. If the company acquired this competing business, it could dramatically expand its customer base, add to its product line, and eliminate a competitor.
On one hand, the opportunity to buy a competitor’s business for almost nothing seemed almost too good to be true. While the presence of that competitor in the marketplace had not caused pricing pressure and was not an impediment to the growth of the company, buying that competitor would eliminate any future competitive problems. Further there was an opportunity to get a step-up in sales volume with little or no money up-front. On the other hand, supporting that acquired business required resources, most noteworthy of which was working capital, and working capital was in such short supply that it was impeding growth of the company’s base business.
The owner of the company decided not to accept the offer to acquire the competitor’s business.
The company focused on growing its own business and developing sources of working capital essential for funding that growth. The company continued to grow and build its access to needed working capital. The company did not push itself to the brink by burdening its limited cash resources with the proposed acquisition. The competitor’s business remained operational but not in a bothersome way, and remained a possible acquisition candidate for the future.
It is always difficult to pass up a deal that appears to be too good to be true. Management should always consider the consequences and what demands that “opportunity” will place on its existing business and the resources for supporting that business. It is often not easy to find the horses to pull one wagon, let alone two, even if the second wagon seems like a gift.