I have observed that traditional startups are often perceived as high-risk and low-profit ventures. That is why many entrepreneurs are turning to business acquisition methods such as leveraged buyouts (LBOs), mergers and acquisitions (M&A), and private equity. The acquisition of an existing business has several advantages, which make it less risky and more profitable than traditional startups. In this post, I will highlight 25 factors proving the superiority of business acquisition over traditional startups.
- Established customer base: According to a stuy by CB Insights, one of the top reasons startups fail is because they don’t have a market need for their product or service. Acquiring an existing business with an established customer base reduces this risk.
- Proven track record of revenue and profits: According to a study by Deloitte, 71% of private equity-backed companies outperformed their peers in revenue growth over a five-year period.
- Existing infrastructure and systems in place: According to a report by McKinsey, a key advantage of acquiring an existing business is that it already has infrastructure, processes, and systems in place, which can help the acquiring company achieve synergies and cost savings.
- Experienced management team and employees: According to a study by Bain & Company, private equity-backed companies often outperform their peers because they have strong, experienced management teams that can execute growth strategies effectively.
- Established brand and reputation: According to a survey by Nielsen, 59% of consumers prefer to buy new products from brands they know and trust. Acquiring an existing business with an established brand and reputation can reduce the risk of failure for new products or services.
- Access to established supply chain and distribution channels: According to a study by the National Bureau of Economic Research, companies that integrate their supply chains through M&A transactions can achieve significant cost savings and improved efficiency.
- Established partnerships and relationships with suppliers and customers: According to a study by EY, one of the key benefits of acquiring an existing business is that it can help the acquiring company establish new partnerships and relationships with suppliers and customers.
- Established intellectual property: According to a study by the World Intellectual Property Organization, the value of intangible assets (such as intellectual property) is increasing and acquiring an existing business with valuable IP can provide a significant competitive advantage.
- Access to existing financial resources: According to a report by Pitchbook, private equity firms have raised record amounts of capital in recent years, which can be used to finance acquisitions and fuel growth.
- Economies of scale: According to a study by the Harvard Business Review, companies that achieve economies of scale through M&A transactions often see significant cost savings and increased profitability.
- Reduced competition through consolidation: According to a report by McKinsey, consolidating industries through M&A transactions can reduce competition and increase profitability for the surviving firms.
- Established regulatory compliance: According to a study by PwC, acquiring an existing business with established regulatory compliance can reduce the risk of costly fines and legal battles.
- Access to established manufacturing and production facilities: According to a report by Deloitte, one of the key benefits of acquiring an existing business is that it can provide access to established manufacturing and production facilities, which can help the acquiring company achieve cost savings and improved efficiency.
- Established sales and marketing channels: According to a study by the Harvard Business Review, acquiring an existing business with established sales and marketing channels can provide a significant competitive advantage.
- Existing contracts and agreements with suppliers and customers: According to a study by KPMG, acquiring an existing business with established contracts and agreements can reduce the risk of supply chain disruptions and other challenges.
- Diversification of products and services: According to a report by McKinsey, diversifying a company’s product and service offerings through M&A transactions can reduce risk and increase profitability.
- Potential for synergies with existing businesses: According to a study by Bain & Company, private equity firms often acquire businesses with the intention of achieving synergies with their existing portfolio companies, which can result in increased efficiencies and profitability. By combining resources and expertise, private equity firms can help their portfolio companies to grow and expand in ways that may not have been possible on their own.
- Lower risk of failure compared to startups: According to a report by Startup Genome, the failure rate for startups is around 90%. In contrast, established businesses that are acquired through LBO, M&A, or private equity transactions have a lower risk of failure due to their established operations and infrastructure.
- Potential for faster returns on investment: According to a report by McKinsey, private equity firms often achieve returns on investment of 20% or more through their portfolio companies, compared to the average return of 8-10% for public companies.
- Established industry knowledge and expertise: According to a study by Deloitte, one of the key benefits of acquiring an existing business is that it can provide access to established industry knowledge and expertise, which can help the acquiring company achieve growth and competitive advantage.
- Access to established networks and connections: According to a report by the Financial Times, one of the key advantages of private equity firms is their ability to provide access to established networks and connections, which can help portfolio companies achieve growth and success.
- Established reputation and credibility in the industry: According to a study by EY, acquiring an existing business with an established reputation and credibility in the industry can reduce the risk of failure for new products or services and help the acquiring company establish a foothold in the market.
- Access to existing data and analytics: According to a report by KPMG, one of the key benefits of acquiring an existing business is that it can provide access to valuable data and analytics, which can help the acquiring company make better business decisions and achieve growth.
- Reduced barriers to entry in certain markets: According to a study by the Harvard Business Review, acquiring an existing business with an established presence in a certain market can reduce the barriers to entry for the acquiring company and provide a competitive advantage.
- Potential for increased market share and dominance: According to a report by McKinsey, companies that achieve market dominance through M&A transactions often see significant increases in profitability and value creation.
Conclusion
The evidence suggests that business acquisitions, such as LBOs, M&As, and private equity, are less risky and more profitable than traditional startups. Acquiring an established business provides numerous advantages, including access to established infrastructure, supply chains, distribution channels, partnerships, and intellectual property. Additionally, existing revenue and profits, experienced management teams, and established brand reputations can help reduce the risk of failure for new products or services.
Moreover, M&A transactions can help companies achieve economies of scale, reduce competition, establish regulatory compliance, and diversify their product and service offerings. Private equity firms often acquire businesses with the intention of achieving synergies with their existing portfolio companies, providing access to valuable industry knowledge, and established networks and connections. Furthermore, the potential for faster returns on investment and reduced barriers to entry in certain markets can provide a significant competitive advantage.
Overall, business acquisitions are a compelling option for companies looking to achieve growth, diversify their product and service offerings, and establish a foothold in new markets. With the right due diligence and strategic planning, acquiring an established business can provide a lower-risk, higher-return investment opportunity than traditional startups.