The only thing constant about markets is change! Perhaps, nowhere does this change manifest itself as clearly as in India where the economy and urban lifestyles are undergoing rapid evolution. As businesses  looking for investment opportunities in newer, brighter, upcoming segments with promises of steep growth rates and quick returns, there is no dearth of good acquisition targets. With the buzzword among companies seeking rapid growth being “boom” we often hear of a ‘boom in the retail sector’, a ‘boom in the housing markets’, a ‘boom in the consumer electronics space’ and similar financial headlines. This is often followed by a frenzy to tap into these opportunities and overcrowding in many cases. Finding themselves in a situation not as promising as they envisioned, exits are sought making it all the more difficult for companies to acquire the right assets. So how do you know if the business you’re looking to acquire is going to stay on the high growth path or struggle?

Nearly every market follows a cycle of upward, peak and downward movement in terms of growth based on influencing factors. Here is a look at a typical scenario involving a trend-setting business within a developing market:

A. A business comes into the market with something new to offer / innovative / trend-setting  and captures the attention of consumers. At this stage it has the advantage of being an early entrant and being “new” which adds to the appeal helping drive faster returns.

B. Others catch on following suit and create more demand gradually turning it into more than just a trend. The competition fuels improvements and growth is quick.

C. Acknowledging this is now a ‘hot’ space to be in even more competitors spring up till the point where it can be crowded and the businesses have increased more than the demand itself. This is the point at which growth can flat-line and then start to drop downward.

D. With the need to correct the demand and supply gap, there is a hurry to find exit strategies by selling, consolidating, merging or even pulling out of the market. This activity eventually balances out everything and the stronger players emerge from the slow down into a more stable and mature market. The growth may not be as steep as in the earliest phase but more stable.

Acquiring a business at points A or B would result in very high growth which translate into quick results. Between B and C however, although during valuation the businesses growth appears promising, after acquisition, a dry phase could follow. This is where investors feel they got the raw end of the deal. It’s important to be able to hold on to the business and wait out the phase from C to D in order to benefit from the revival of growth which will follow once the market stabilizes and picks up from D to E. There are always risks but knowing where within the cycle you are when you make the acquisition will prepare you for what lies ahead.

In a developing economy like India, what may be considered an old business idea which has been growing almost laterally for some years now in developed economies may be considered a trend-setting business in India which is at the start of its lifecycle. For example the arrival of large mid to large retail shopping malls sparked off a new phenomenon some years ago when they started. The novelty brought on large crowds of consumers and high foot traffic rates. As malls started surfacing everywhere very rapidly it brought on rapid growth followed by a decline till it has now turned from a phenomenon into a more sustainable form of retail.

While being a part of the “next big thing” is what every business craves and is indeed the key to succeeding, it’s always good to evaluate where we stand in the cycle before making that opportune acquisition.