Developing a growth strategy can be a little like a trip to the farmer’s market. Everything looks good at first, and it’s hard to see the downside to almost any of the potential opportunities. Acquisitions no doubt seem appetizing; however, unless you want to wind up with a fridge full of rotten purchases, you need to choose well. Although every company’s growth strategy is different, these three signs will usually point to an acquisition you should avoid.
It Doesn’t Clearly Match the Objective
A good growth strategy gets your company from Point A to Point B with as few interruptions as possible. If you’re unsure if a potential acquisition target will help or hinder that strategy, try to describe in a single sentence how the acquisition will help you get to Point B. The longer it takes you to explain the acquisition’s usefulness, the less likely it is that it will be a worthwhile investment for your company.
You’re Not Playing the Same Game
Although there is a time and a place for diversification, most solid growth strategies these days are focused within the growing company’s market. Competitors, suppliers, and distributors within your market are great choices for acquisitions, because controlling their performance means controlling more aspects of your market. If a target’s connection to your market is tenuous or hard to explain, then it’s unlikely to be a good fit for your growth strategy.
It’s Out of Alignment with Your Portfolio
Again, diversity in acquisitions is not always a bad thing, but a portfolio with too much variety will weaken your company’s growth strategy. This is another good place to apply the one sentence test: if you can’t explain in one sentence how your new acquisition will relate to your portfolio of other acquisitions, then it may be time to reconsider whether it’s a good fit for your company’s growth strategy.
“Innovative” should be a descriptor of the core of your growth strategy, not a euphemism for the high-risk nature of your acquisitions.