Why Acquiring Smaller, Agile Manufacturing Firms Could Be Your Next Smart Move
December 2, 2024 | by Randy Rua
When it comes to expanding your manufacturing business, bigger isn’t always better. In my experience, some of the most transformative growth comes from acquiring smaller, highly specialized shops. While these companies might be smaller, they can bring unique technologies, niche expertise, and innovative approaches that can be game-changers for your operations.
Starting Small for Easier Integration
It’s often better to start with a smaller company when you’re considering your first acquisition (around 10% to 20% of your size). Integrating a company that’s half your size can be overwhelming and risky. Smaller acquisitions are generally easier to manage and can be seamlessly integrated into your existing operations.
I’ve also seen companies acquire firms that are even just 1% of their size. You might wonder why bother with such a small acquisition. The reason is that these smaller firms often bring something unique to the table—specific technology, expertise, or niche capabilities that are hard to develop internally.
For instance, a $150 million plastics company I worked with acquired a $2 million automation firm. Despite the size difference, this small acquisition allowed them to integrate specialized automation technology across all their facilities. The goal wasn’t immediate revenue growth but enhancing capabilities and gaining a competitive edge.
Leveraging Niche Expertise
Smaller firms tend to be highly specialized because they can’t be everything to everyone. This focus often leads them to innovate more within their niche. They also understand the challenges unique to their segment of the market.
When a larger company acquires a smaller, niche firm, they acquire specialized knowledge and innovative approaches. This can prove to be valuable in an industry where technology and expertise are critical.
Challenges and Solutions in Integration
One of the biggest challenges in acquiring a small company is retaining the key people who make it successful. In many cases, the business owner wears multiple hats—acting as the general manager, sales leader, and sometimes even the chief financial officer. If you don’t have a plan to retain or replace that talent, you risk losing the very value you sought in the acquisition.
Identify key team members early on and consider retention strategies like stay bonuses or clear career paths. Without this planning, the integration can falter, and the acquisition may not deliver the expected benefits.
Understanding the culture of the small firm is also critical. Smaller companies often operate differently—they may be more entrepreneurial, with employees who are independent and self-starters. If the culture clashes with that of your larger organization, it can hinder the innovation and agility that made the smaller firm attractive.
Sometimes, it’s best to allow the acquired company to maintain some level of autonomy. Let them continue to do what they do best while providing them with the resources and support to thrive. This approach can help preserve their innovative edge while integrating them into your broader strategic goals.
Positioning Small Firms for Acquisition
For small manufacturing firms considering being acquired, focusing on your niche and building a strong, self-sufficient team can make you an attractive target. I’ve seen too many small companies try to diversify too broadly, which can dilute their value. Stick to what you do best and make sure you have systems in place that don’t rely solely on the owner’s involvement.
By making your company easy to integrate—what we sometimes call “easy to roll up”—you not only become more attractive to potential buyers but can also command a higher valuation. Increasing the multiple that buyers are willing to pay can significantly enhance your company’s value because they see the strategic advantage in what you offer.
Looking Ahead
Manufacturing is changing rapidly, with increasing competition and technological advancements. Acquiring smaller, agile firms can provide the innovation and specialized expertise needed to stay ahead. Whether it’s new technology, niche market access, or unique products, these acquisitions can offer significant advantages.
But remember, success depends not just on the deal itself but on how you integrate and support the new addition to your company. Plan ahead, focus on retaining key talent, and be mindful of cultural differences.
If you’re considering such a move, we’re here to guide you through the process. At NuVescor, we specialize in matching buyers and sellers in the manufacturing sector, ensuring that each transaction is a stepping stone toward greater success.
