A key consideration for a strategic purchaser evaluating an acquisition opportunity is the benefits that can be realized by the purchaser. The first benefits that come to mind are through the acquisition of the profits and cash flows of the business, but other benefits known as synergies have the potential to be realized as well.
Below are three key categories of synergies that can possibly be realized:
- Economies of scale
- Strategic advantages
- Financial synergies
Economies of Scale
Economies of scale refer to the benefits enjoyed by businesses as they increase in size. These benefits can include increase purchasing power, reduced overhead (as a percentage of sales), greater pricing power and more efficient capital asset utilization.
Strategic advantages come in a variety of forms and can arise from acquiring a competitor and removing them from the marketplace, acquiring a company that operates in a market you want to break into, or acquiring a company to access a new, breakthrough product.
Operating and Financial Synergies
Financial synergies are created through purchasing a company and eliminating functions that would otherwise be duplicated. This can include removing the accounting department from an acquired company and utilizing the existing company group or reducing marketing staff at the acquired business. In addition, larger businesses may enjoy greater access to capital at more attractive terms.
How can we help?
SVG Capital Group’s advisors, with over 50 years of combined experience in business valuation and facilitating transactions, can help you to identify and value the potential synergies that may be available to a strategic acquirer of a particular business. With this knowledge you will have a much clearer picture of the value of a target company and the combined business’s future performance.