When Making Acquistions, Are Your Buying a Product or Channel?

When Making Acquistions, Are Your Buying a Product or Channel?

by Dec 5, 2023Advisory Groups

I’ve previously emphasized that acquisition alone is not a strategy. However, when executed effectively, acquisitions can serve as an alternative to organic growth, propelling your business forward at an accelerated pace. It’s crucial not to view acquisitions solely as a means of scaling up, as the notion that bigger always equates to better can be misleading.

There are some additional finer elements you should consider before contemplating an acquisition. Specifically, are you buying a channel or a product?

Let me elaborate.

Cutting Low-Hanging Fruit

One of the most obvious reasons for an acquisition is the opportunity to make significant cost cuts that can immediately impact profitability. For example, there is always redundancy in high-level positions that you can pare down. You don’t need two CFOs, two heads of IT, or two accounting departments. There’s always room to cut somewhere, even with volume purchases and contract renegotiations.

More times than you can imagine, two companies buy similar raw materials–only one of the entities has cut a far better deal with the suppliers than the other. That means the new combined entity can leverage the better deal to its benefit in a renegotiation, saving a bunch of money.

Cutting costs is only half of the reason you could consider an acquisition. The other is growing your revenue in faster ways.

But, when you acquire another company for this reason, what are you buying?

New Channels and Existing Products

One option is that you are buying a channel. This might mean you have a great product, but you’re not talking to enough customers. But, if you could acquire a business with a robust channel filled with potential new customers, you could turbocharge your sales.

One of our CEO Project members had a licensing business for various forms of intellectual property. They were deep in the professional market for this product but not strong in the hobbyist market. They acquired a firm with synergistic products and a deep customer base in this desirable market. The combination meant they could grow revenue by selling their product to the hobbyist market.

When buying a channel, the justification for the acquisition typically centers around revenue growth. Sometimes, cost reductions are available, but that is not the driver of the business case. In an ideal situation, the creation of the product could be combined for material cost reduction, but this isn’t always available.

New Products Into an Existing Channel

The other side of the revenue growth model with an acquisition is the ability to offer your existing customers a new product. That might mean you have a fantastic channel filled with loyal customers but struggle to send enough new products. If you could find new products, you could upsell your existing customer base.

An example to consider is a sophisticated boutique consulting firm I worked with that had some moderate success growing their business. But they always felt they couldn’t get in front of the biggest deals or clients. That led them to sell the business to a large consulting firm with a larger channel. Within just a few years, sales at the once boutique firm tripled, all because they could finally sell into a channel they couldn’t reach on their own. The more prominent firm viewed this as a product acquisition that they plugged into their more extensive channel.

A classic example of a company that does this well is Coca-Cola. They don’t have a strong reputation for product development. Instead, they wait for new beverage trends and products to develop and then swoop in and buy them. They then send those new product acquisitions into their global distribution channels. They do this repeatedly with brands you know, like Snapple, Honest Tea, and others.

Finding Synergy

Ideally, the best mergers of companies would find ways to match strong product offerings with robust distribution channels. In other words, the flow goes both ways. The buyer gets new markets for their products, and they get new products for their market.

That’s precisely what happened with that boutique consulting firm I cited earlier. On the one hand, they had a robust strategic consulting services offering. On the other hand, the larger company that acquired them lacked that kind of expertise on their team. So, by acquiring the firm, they found a way to offer a new value-added service to their existing clients in their distribution channel.

So, when contemplating an acquisition, recognize that you’ll likely find easy ways to cut costs and boost profits. But when it comes to speeding up your revenue growth, be clear about whether the real opportunity is to acquire a channel or a product. The difference matters.