How large should an acquisition target be relative to your SME?

Can an SME with annual revenue of €7 million acquire a business generating €2 million? What about one generating €6 million? Both transactions may be feasible, but they require different resources and organisational capabilities. Understanding what size of acquisition a business can support means looking beyond revenue alone.

The acquiring company will need to finance the transaction, continue running its existing business and take responsibility for the acquired company. The size of the target business therefore needs to be assessed against the buyer’s actual capacity to fund and manage it.

Relative revenue provides a starting point

Comparing revenue helps put the scale of an acquisition into perspective. For a €7 million business, acquiring a €2 million company means adding an operation that is relatively small compared with its own. Acquiring a €6 million company means almost doubling in size, potentially requiring significant changes to how the combined business is managed.

However, relative revenue captures only part of the commitment. Revenue does not tell you the purchase price, how much cash will be needed after the acquisition or how many people will need to be managed. Two companies with the same revenue can have very different structures and funding needs.

There is therefore no universally safe ratio. Even a much smaller target may require more support than the buyer can provide.

How much management time is available for the acquisition?

The first constraint may lie within the buyer’s own organisation. If the owner already handles customers, production and day-to-day decisions personally, a second business adds responsibilities to a team that may already be stretched. Financial resources alone will not solve this problem.

Before setting an upper size limit, it is useful to establish:

• who will lead the acquired business and what their responsibilities will be;
• who will manage the integration and how much time they can devote to it;
• who will take over the responsibilities these people leave behind in the acquiring company;
• what additional expertise will be needed before or immediately after completion.

Managers who can operate independently within the target business can provide reassurance. Conversely, if the seller performs several roles and intends to leave quickly, even a €2 million business may require people with skills the buyer does not currently have.

Financial capacity must cover the period after completion

The purchase price is one part of the overall financial commitment. Transaction expenses, necessary investment, integration costs and working capital requirements must also be considered, including inventory, customer collection periods and supplier payment terms.

A €7 million business with strong cash generation and modest debt may therefore have different options from a company with the same revenue that already uses all its available cash to support day-to-day operations.

An affordable acquisition size must be assessed against the cash that will remain available after completion, allowing for debt repayments and the acquiring company’s own investment needs. A healthy operating margin does not automatically translate into available cash.

Complexity can matter more than size

A larger target with capable managers and well-organised operations may require less day-to-day intervention than a smaller business that depends entirely on its owner.

The intended operating model after the acquisition also matters. Keeping two businesses operationally independent requires coordination and oversight. Combining production, administration or sales teams requires people and resources to manage the transition.

Both approaches involve work. What changes is the nature of that work and, consequently, the scale of acquisition the buyer can support.

A second site some distance away, unfamiliar production processes or business systems that need replacing can make a target with modest revenue demanding to manage. These factors should inform the acquisition criteria before attention turns to a specific opportunity.

A €7 million SME considering two options

Consider two hypothetical situations.

The first target generates €2 million in revenue. Its owner manages sales and production, wants to leave soon, and some equipment requires investment. The buyer would need to appoint an operational leader, manage the handover of customer relationships and fund the necessary improvements. The relatively small revenue figure may conceal a substantial commitment.

The second target generates €6 million in revenue. It has managers who can work independently, processes familiar to the buyer and operations that consistently generate cash. It could be easier to manage operationally, but require a much larger investment and a management structure suited to the increased scale.

This comparison cannot determine which option is preferable without knowing the purchase price, debt position and available resources. It does, however, show why the smaller target is not automatically the more manageable acquisition, and why the larger one should not be ruled out on revenue alone.

Set a target size range with clear conditions

The search can begin with a revenue range, provided it is accompanied by the conditions that make an acquisition feasible: an affordable total investment, the target’s management autonomy, the changes required and the people available to implement them.

The upper limit may change if the buyer strengthens its management team, increases the capital available or identifies a target with particularly favourable characteristics. Any change should be based on tangible resources, rather than enthusiasm for an opportunity.

The right size is one that allows the buyer to manage the acquired company while keeping its existing business running well, including during the most demanding months of the transition.

Frequently asked questions

How much smaller should an acquisition target be than the buyer?

There is no single ratio that works for every SME. Revenue is an initial reference point that must be considered alongside the purchase price, financial capacity, available management resources and integration complexity.

Can an SME acquire a company of a similar size?

Yes, but it needs to establish how it will finance the transaction and manage a larger business after completion. The ability of both companies’ management teams to operate independently, and the buyer’s capacity to coordinate them, become particularly important.

How can you tell if a target is too large?

One clear warning sign is a lack of resources to manage it without weakening the existing business. If the plan relies on people who have yet to be identified, uses all available cash or depends on uncertain immediate benefits, the size or terms of the acquisition need to be reconsidered.