What are the risks incurred when expanding a company via acquisition?

Grant Leboff: One of the things I think that sometimes entrepreneurs don't consider is looking at growth through acquisition. For you, how important a path is that? Guy Rigby: I think it's a really important opportunity. I guess some entrepreneurs don't think about it because they don't understand it. They don't understand how to go about it. Some don't necessarily think it would give them a commercial advantage and others will actually say ;well I want to build my business through acquisition. To make an acquisition strategy successful, you need to have an understanding, a real understanding of what your vision is and where you're going to try to get to. You'll probably need finance, if you haven't got it yourself, because actually people need to be paid to sell their businesses to you. Sometimes you can do particular deals with them, you can give them some shares in your business, give them some cash, you can do what they call earn outs which enables you to pay overtime, perhaps out of the profitability of the business, but there are two key issues which I think businesses need to think about. One is the cultural impact of acquisitions and the other is the management of the acquisitions. Your management team is, presumably ,already relatively fully stretched doing its own day job and suddenly you've got another business for which they are responsible. So how do they manage that? They've got to have enough headroom, in terms of their day jobs, to be able to do it. Secondly you can have one company or 20 people over here and one company or 20 people over there and their cultures are completely different and they clash, and actually, that can be a disaster. I think the stats show that most acquisitions prove unsuccessful. Which may be the answer to your original question about why a lot of entrepreneurs don't go for them. Grant Leboff: So acquisitions can be a very interesting route to growth and to buy market share and those kind of things. So if you're a business leader watching this, and you are thinking; I haven't considered acquisition before, where would a business leader start to explore that as an option? Guy Rigby: I think what they would be doing is saying why would I want to acquire people? Do I want more management? Do I want more sales staff? Do I want access to a customer base to which I can sell my products? Do I need supply chain support? Whatever it may be, there will be a commercial driver; why acquisition can help them get to where they want to be quicker than without. And then what they need to do is they need to fully understand the risks associated with making acquisitions. You're buying a company. You don't necessarily know what's inside that company, typically. So you need to do what they call due diligence. Financial due diligence, legal due diligence. You have to find out everything you can about the business, and cultural due diligence. Are these the kind of people that we can work with or actually, the day after we take them over are we going to have a filthy great row and half the important people I want to acquire are going to walk out the door. It can happen. Often the acquired company has some quite wealthy individuals in it because they've had their own incentives schemes that of course when the business is sold suddenly they have some money. So what is their incentive to carry on working in the business or isn't that important to too? So there are lots and lots of issues. I think the whole idea of making acquisitions is a brilliant way of growing a business. But you have to be fully aware of the risks and you have to plan for them and make sure that you take them more into account before you set off down that route.