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\nProfessional services firms have two primary paths to growth. They can grow organically, gradually expanding their client base and territory over time. Or they can grow by acquiring other businesses that complement theirs.<\/p>\n
Each approach has its upsides and downsides.<\/p>\n
Organic growth usually comes with lower financial risk and allows you to build a tight-knit team\u2014so you can enjoy the fruits of the brand equity and goodwill you\u2019ve cultivated over time. But it can be slow and geographically limiting. Acquiring other businesses, on the other hand, can quickly add new offices, revenue and headcount, as well provide access to new markets and hard-to-find talent, IP and skill sets. However, an acquisition growth strategy comes with serious challenges, as well.<\/p>\n
In this article, we explore five of these challenges. If you have wondered if an acquisition growth strategy is right for your firm, consider how much risk you are willing to take on. If you prepare for the challenges ahead, however, your chances of success are far greater.<\/p>\n
Before we dive in, let\u2019s take a quick look at the research.<\/p>\n
At Hinge, we study the most successful firms to understand what works and doesn\u2019t work in the real world. When we looked at M&A, almost half of high-growth firms\u2014those that achieve at least 20% revenue growth over a consecutive three-year period\u2014were part of a merger or acquisition in 2024.<\/p>\n
We also looked at what percentage of revenue was attributed to M&A. In 2024, that amounted to more than a third of revenue at both high-growth and no-growth firms.<\/p>\n\n
While 54% high-growth firms did not engage in M&A in 2024, the fact that 46% did<\/em> should make you sit up and take notice.<\/p>\n But growing through acquisitions isn\u2019t right for every firm. Below are five common challenges to think about and prepare for before you take the plunge.<\/p>\n There are many ways to finance an acquisition, from tapping a firm\u2019s or owners\u2019 savings to bank loans to retained equity to earnouts. However you structure the deal, it will require capital, and that can strain a business\u2019 finances, especially in an uncertain economy. If the deal incurs a great deal of debt, it can put tremendous pressure on both sides to generate additional revenue to cover the interest payments while also hitting financial targets.<\/p>\n In my work with professional services firms, this is the challenge I hear about most often. Buying a firm is the easy part. Merging two disparate cultures can be devilishly difficult. I\u2019ve encountered firms that run under entirely different business models, and integrating teams that operate under very different rulebooks can seem like an impossible task. I\u2019ve also seen the former owners of the acquired firm\u2014retained during the transition\u2014clash with the new leadership. And if morale crumbles at the acquired firm, valuable talent can head for the door.<\/p>\n Now, culture is not always a significant challenge. If the two firms are similar (such as two traditional accounting firms coming together), or if the acquiring firm offers more flexibility and benefits than the acquired firm, it can be a relatively seamless transition. But even in these cases, integrating everyone into a unified organization can take patience and empathy.<\/p>\n A firm that acquires another has to make a fundamental decision: do they roll the firm into organization, or do they allow the acquired organization to retain its name and brand? Either way, the transaction can generate confusion and anxiety in the marketplace. If the acquired firm is sucked into the mother ship, the former firm\u2019s clients\u2014who may know little about the acquirer\u2014often worry that the relationship and trust they have built over all these years will be lost. They may begin to wonder \u201cWho is this new firm that\u2019s been thrust on us?\u201d They may begin to look around at their options.<\/p>\n If, on the other hand, the acquired firm retains its brand, the acquirer receives relatively few marketing benefits. It won\u2019t be much better known in the acquired firm\u2019s market. And it will have to support and market two brands rather than one. On top of that, people in the marketplace who know about the transaction may wonder what\u2019s changed under the hood.<\/p>\n While the buzzword \u201csynergy\u201d isn\u2019t as ubiquitous as it was twenty-five years ago, the concept lives on. Suppose you buy a firm that promises to add new capabilities to yours\u2014say, a new area of expertise or a new technology\u2014you might reasonably expect the combined forces to create powerful new opportunities. The sum to be greater than the parts. But things don\u2019t always work out the way you planned. Your clients might not be as excited as you are about this shiny new addition. Or the new efficiencies you expected may never emerge. Any number of things can turn \u201caha!\u201d into \u201cuh-oh!\u201d<\/p>\n The acquisition process is complex. It requires a great deal of attention from top management. And a transaction can take 6 to 12 months or more to complete. In the meantime, if you take your eyes off your own business you may discover that new opportunities decline, delivery problems go unaddressed or your team grows resentful as it is loaded with additional responsibilities.<\/p>\n These challenges are not insurmountable, as the high percentage of M&A activity at high-growth firms bears out. The key is to anticipate them and evaluate each potential acquisition with each in mind. You can avoid most pitfalls if you have a clear plan to address them.<\/p>\n Do the Due Diligence<\/strong>\u2014It\u2019s all too easy to succumb to wishful thinking and assume everything will work out because, for example, you and the other firm\u2019s owners like each other. Dig into the finances, ask uncomfortable questions and try to uncover everything you can about the firm before you enter into a deal.<\/p>\n Communicate Clearly<\/strong>\u2014Many deals are conducted in secret. While it may make sense to keep things confidential during the exploratory stage, keeping the proceedings secret too long can create problems. Employees, particularly at the acquired firm, rarely appreciate a surprise. If they learn at the last minute that they are being bought, they may jump to conclusions\u2014and jump ship. Instead, let both teams know as early in the process as practicable, even if the deal isn\u2019t certain to close. Explain why it\u2019s happening and how it will create new opportunities for them. Hold Q&A sessions. Be open and candid. You may still lose a few people, but most will appreciate the honesty and advance warning. The longer a team has to get used to the idea, the easier the actual transition will be.<\/p>\n You also need to communicate with your clients. In this case, the timing is less important, but when you are ready to announce the change, explain how the acquisition will benefit them: New services. Deeper expertise. A bigger team. More flexibility.<\/p>\n The acquired firm will also need to assure their clients what will and won\u2019t change. Depending on the arrangement, that might include messages like these: \u201cYour engagement team will not change\u201d; \u201cThe quality of our work will get even better\u201d; or \u201cWe can now give you access to specialized expertise we didn\u2019t have before.\u201d<\/p>\n Plan for Contingencies<\/strong>\u2014What problems might you encounter when merging the two cultures? How will you tackle them? What if the hoped-for synergies don\u2019t appear? What are the ramifications and how will you address them? What are your financial risks, and what will you do if you experience financial strain? Thinking ahead allows you to react quickly before a fire blows out of control.<\/p>\n An acquisition growth strategy isn\u2019t for everyone. But for firms that want to grow quickly, enter new markets where they are unknown or gain access to new people and skills, a well-executed acquisition can be the fastest, most efficient path to their destination.<\/p>\n","protected":false},"excerpt":{"rendered":" Professional services firms have two primary paths to growth. They can grow organically, gradually expanding their client base and territory over time. Or they can grow by acquiring other businesses that complement theirs. Each approach has its upsides and downsides. Organic growth usually comes with lower financial risk and allows you to build a tight-knit…<\/p>\n","protected":false},"author":86,"featured_media":48989,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"om_disable_all_campaigns":false,"footnotes":""},"categories":[1],"tags":[432],"class_list":["post-48987","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorized","tag-mergers-and-acquisitions"],"acf":[],"yoast_head":"\n5 Challenges When Acquiring a Firm<\/h2>\n
1. Financial Burdens<\/h4>\n
2. Incompatible Cultures<\/h4>\n
3. Brand Confusion<\/h4>\n
4. Expected Synergies Never Emerge<\/h4>\n
5. Costly Distraction<\/h4>\n
Plan for Success<\/h2>\n