The Use of Mergers and Acquisitions as a Growth Strategy for Startups and Small Businesses

April 28, 2023

Mergers and acquisitions (M&A) is a tactic often utilized by organizations seeking to expand their operations, increase market share, and diversify their products and services. This is especially true for large companies like Disney, which, under the direction of CEO Bob Iger, revitalized its brand in the last two decades with the acquisitions of leading production companies such as Pixar, Lucasfilm, 20th Century Fox, and Marvel.

This approach, however, is not just for the biggest corporations. For small businesses and startups, M&A can be a powerful and efficient growth strategy, but it is still a complex one that requires careful planning and execution, from finding the right target companies to implementing the right business plans after the transaction is done.  

Partnering traditional and digital marketing techniques for greater growth

Acquire New Customers and Increase Market Share

One of the main advantages of M&A is that companies can instantly acquire new customers and increase their market share. For example, suppose a company wants to open a new location in a different city. This process is typically time-consuming and costly. Some of the tasks that the company may need to perform may include the logistics associated with opening a new location (i.e., finding and leasing an office), marketing to promote the company’s products and services in the new market, finding new suppliers, acquiring and retaining customers, and adapting to new competitors. 

But suppose another company offers similar products and services that already has an established customer base in the target city. The company could potentially acquire the local company, assume its lease, continue effective marketing strategies, and acquire an existing customer base. Moreover, the local company can provide the acquirer with invaluable information to ensure that it is successful in the new market. 

Achieve Economies of Scale

M&A helps companies to achieve economies of scale in several ways. First, by consolidating their operations, companies can reduce overhead costs such as administration, management, and infrastructure. Second, M&A can provide the acquiring company with a more streamlined supply chain through better coordination of procurement, transportation, and inventory management. This has the potential to result in cost savings through reduced inventory, transportation, and storage costs. 

Third, M&A generally contribute to increased investments in R&D. This is especially critical for startups that are still developing their products and services. Increased R&D spending can help companies develop products at a lower cost per unit and even discover entirely new products and services. Finally, M&A gives companies greater pricing power. They can negotiate better prices for raw materials, labor, and other inputs. This leads to lower costs and increased profit margins. 

Diversification and Access to Talent 

M&A can provide companies with access to new talent. This can include employees with specialized skills or expertise, managers, and/or executives. Deciding which talent to retain, however, requires careful consideration and often depends on the sizes of the two companies. As research firm McKinsey notes, “When a larger, often better-performing company acquires a smaller lower-performing firm that operates within its core business, employee selection tends to favor the acquirer’s incumbent talent.” And when the acquisition involves breaking into a new market, “retaining the target firm’s employees is essential to the deal’s value, and there is usually limited overlap between the target’s workforce and that of the acquiring company, aside from support functions.” 

Acquisitions can also provide companies with access to complementary products and services, as well as new markets. This helps companies to diversify by spreading risk across different segments, reducing their reliance on a single product or market. 

Increased Bargaining Power and Improved Efficiency 

When a company increases its market share, it can gain more bargaining power with suppliers, customers, and competitors. For example, suppose a small manufacturer of automotive electronics and lighting acquires a competitor. The acquirer now has a larger base of clients, such as makers of niche high-end electric vehicles, it can sell to, which can help it negotiate more favorable terms with its own suppliers. In this case, the now-larger automotive electronics manufacturer might be able to attain a reduced per-unit price on components by ordering greater quantities.

Depending on the situation, M&A may also improve efficiency by eliminating the duplication of functions and resources. Moreover, the acquisition often brings in new technologies that can further improve operations and the quality of products and services. 

Competitive and Financial Benefits 

Some of the competitive and financial benefits of acquisitions are already evident. For instance, an increased market share provides increased bargaining power to negotiate lower prices and reduced costs by achieving economies of scale. But M&As provide some additional financial benefits that are worth mentioning.

First, the acquiring company can significantly boost its revenue in several ways, not only from a broader base of customers but also potentially by being able to offer new products and services. Second, M&A often leads to tax benefits, which can include the ability to take advantage of tax credits and use net operating losses. 

M&A can also provide companies with access to intellectual property and new technologies that can give them a competitive advantage. For example, the company may be able to automate time-consuming manual tasks or deliver improved customer experiences. 

DCG Can Help You to Navigate the M&A Process

M&A can help small businesses and startups to achieve strategic growth. But these transactions do carry risks and can be incredibly complex. They require careful planning, extensive due diligence, and execution. Dave Cantin Group (DCG) is a financial advisory company focused on the automotive sector. Our industry-leading Acquisitions division includes M&A attorneys, accountants, former OEM executives, and former dealers, and we have successfully represented a diverse range of companies on both sides of the negotiating table.

Contact DCG today to speak directly to an automotive M&A specialist and learn how our team can help you achieve strategic growth and get the most out of your next automotive business acquisition or sale.