In today’s uncertain economic climate, many small business leaders recognize the importance of developing and accelerating alternative engines of growth for the future. These new businesses, known as “Engine 2s,” use the scale benefits of the core business to grow faster than an independent start-up could. During downturns, companies make bold moves that enable them to emerge stronger than their competitors. While it may be tempting to build a new business from the ground up, new research strongly supports the case for buying. Of the most successful Engine 2 businesses over the past 25 years, 40 used M&A as a significant part of their scaling plans. This is an important finding, as lower valuations and less competition for deals make it a buyer’s market.
Advantages of Buying Over Building
Speed
Building a team organically can take years longer than buying, which may put the company behind in a fast-moving competitive environment, allowing others to secure a strategic edge. The speed advantage is multiplied for acquirers that are skilled at integration and that design ways to begin delivering shared value on day one.
Effectiveness
Without in-house expertise for the new business, a company could be set back by several mistakes along the scaling journey. Integration and alignment challenges are typically easier to overcome than trying to build a new business without veteran insights.
Cost
M&A comes with premiums, but there are high premiums required to lure critical talent away individually. And building a business also often comes with costs associated with false starts, reorganizations, and executive interventions that may be necessary before the organically built organization begins to deliver on its mission.
Common Archetypes for Successfully Buying and Scaling an Engine 2
Rolling Up Businesses with Similar Cores
In these cases, an acquirer typically has some experience in the desired Engine 2 business and is looking to build scale rapidly through multiple acquisitions of existing players. This traditional business-building strategy has been more difficult in recent years because of mounting competition from well-funded private equity acquirers. To succeed, the buyer needs to be especially strong in diligence, confirming the strength of the business and how well the asset fits with the new engine. It’s also critical to emphasize integrating the new asset into the larger engine with minimal IT dis-synergies and minimal losses of customers and key talent.
For example, if a small manufacturing company is looking to diversify and expand into a related industry, it may consider acquiring a company that manufactures complementary products. This allows the small business to build on the expertise and capabilities of the acquired company and quickly scale up its new business.
Buying Capabilities to Create a New Core
In these situations, the M&A target is strategically attractive for capabilities or assets that will expand a new growth engine the company has in mind. The target may have critical talent, data, infrastructure, or domain knowledge that the acquirer lacks and that can be applied to existing or future new growth engines. These acquisitions are most common in technology, in which serial acquirers such as Google and Microsoft have bought hundreds of smaller companies with the aim of applying learnings and expertise into new and enhanced products and services.
For example, a small tech company may acquire a startup with expertise in artificial intelligence or machine learning to enhance its product offerings and develop innovative solutions for its clients.
Creating New Markets
In this archetype, the acquirer identifies a market gap or unmet need and seeks to create a new market for its products or services. This approach requires a significant investment in research and development and marketing, as well as patience and persistence to build a new market from scratch.
For example, a small business may identify a need for eco-friendly cleaning products and invest in research and development to create a line of environmentally friendly cleaning products.
In conclusion, while building a new business from scratch can be tempting, the benefits of buying and scaling an Engine 2 are hard to ignore, especially for small businesses. It provides speed, effectiveness, and cost advantages that are critical in a fast-moving competitive environment. By understanding the archetypes of successful Engine 2 acquisitions and tailoring priorities and areas of focus, small businesses can effectively navigate the M&A landscape and emerge stronger than their competitors. The key is to have a well-designed strategic plan, conduct extensive due diligence, and execute the integration process efficiently to scale up the new engine and build a leadership position in a growing market. With careful planning and execution, buying an Engine 2 can be the right move for small businesses looking to accelerate growth and emerge stronger in a volatile economic environment.
