The driver for an acquisition is often that a large entity wishes to expand its capabilities (products or services) and/or its geographical presence and has figured out that it’s likely to be cheaper, in the long run, to buy rather than build.

Irrespective of their often considerable resources, history has taught large enterprises that they are usually not good at starting things from scratch and they often lack the innovative, passion and entrepreneurial flair that allows a new business or service to prosper and thrive.

In fact, large companies are bad at innovation by design. As outlined by Maxwell Wessel in his article ‘Why Big Companies Can’t Innovate’ (1) , “In its infancy, a company is designed to bring innovation to the market. A start-up’s success is not gauged by earnings; it’s measured by how well it identifies a problem in the market and matches it to a solution… Within a mature organisation, the measure of success is very different: it’s profit…. Organisational structures and processes emerge to guide the company towards efficient operation. Seasoned managers steer their employees from pursuing the art of discovery and towards engaging in the science of delivery.” This is why many successful mergers and acquisitions come from marrying the innovation of start-ups with the capital and distribution channels of larger enterprises.

Typically, a smart acquirer will save both time and money by making the right acquisition. Provided it’s done correctly we think the same opportunities are also available to small to medium sized enterprise.

Certainly there is a need to ensure targets are proportionate to the acquiring party’s scale. However, the same proportionate benefits are available to SME’s even if there are less zeros attached the price tag.

We estimate that 350 medium sized companies were sold in Australia in 2015 and for every completed deal there were 14 other businesses for sale which were unable to find a buyer. These odds are long and confirm the current statistical reality that there are many more business sellers than business buyers.

That fact is unlikely to change over the next decade ; we are at the beginning of a huge shift in business wealth as more than 1.4 million baby boomers who own businesses, employing 7.9 million people and contributing $500B in GDP look to retire by 2024 (2). Fewer than 25% of business owners have any plan to hand the business down to the children (3) and management are often incapable or unable / unwilling to take over the business.

Therein lies the significant opportunity for ambitious, well run small and medium businesses to intelligently evaluate their sector for an opportunity to expand by acquisition.

Now this is not a get-rich-quick scheme and typically we don’t see too many people do this well – even large corporate acquirers. Nevertheless, there are genuine opportunities to create value through acquisition whilst managing the down-side risks.

To read more about ensuring acquisition is successful for your business, see our checklist.

Once an SME has identified acquisition as the best method to expand, the next question is typically “How would we fund it?”

How can an SME fund acquisition?

Since the  GFC lenders “have become more risk averse, impacting negatively on the availability of credit for SMEs.” (4) With the proportion of annual bank loan write-offs from SME loans doubling (though only from 0.5% to 1%) since pre-GFC compared with losses in housing loans remaining stable (5), it’s no surprise that the banks in Australia are 80% geared toward mortgage debt and mostly domestic dwellings. They understand property – it’s low risk (so far anyway).

Historically banks have done most of their business lending to the SME sector on the back of property and often the personal property of the business owners. However, increasingly the banks are waking up to the generational shift taking place and the huge numbers of gen X and Y who don’t yet own property – or if they do they have low levels of equity with which they can borrow against. (See Table 1)

They are also aware that the baby boomers, even the fit and healthy ones can’t live forever, so they need to adapt.

Table 1: Australian Home Ownership Rates by Age Groups: 1961-2010