Business acquisitions can play a large role in the success and growth of companies. SMEs use acquisitions to bolster their market presence and acquisitions aren’t a rarity in the corporate world either. Alphabet – Google’s parent company – had reportedly acquired over 200 companies by 2016.
But what is a business acquisition and how do they work?
What is a business acquisition?
A business acquisition is the purchase or division of a company. Some companies are bought in cash whereas others are purchased through a combination of cash and the target company’s stock. A “leveraged buyout” is when an acquisition is financed by debt.
As well as companies acquiring other companies, a financial company or individual can make an acquisition – usually to resell it at a profit. You can compare this situation to a property developer purchasing a home to renovate before selling it on at a higher price.
Why do companies make an acquisition?
Business acquisitions happen for a number of reasons. The acquiring company might be aiming for a larger share of the market or they may want to diversify. It could also be that they want to reduce costs by gaining access to another business’ assets and knowledge.
Let’s take a closer look at some of the reasons behind business acquisitions.
- As a growth strategy
Sometimes it’s easier for a business to grow by acquiring another company, especially if it’s logistically constrained or lacks access to resources. In this case, the acquiring company may look to purchase a startup with potential as a way to increase profit.
- To diversify the business
While many business acquisitions happen between companies in the same sector or field, there are instances of businesses acquiring companies operating in completely different spheres as a way of diversifying their own offering.
- To enter new geographical markets
Oftentimes, a company will acquire another if it wants to expand its international operations. Doing so enables the purchasing entity to start their global journey off on a stronger footing as they will have access to an established customer base and brand identity.
- To dominate more of the market
Of course, another common reason for business acquisition is to gain more of the market share.
- To acquire technology & expertise
In some instances, it can be cheaper for a company to buy another that has the latest technology already in place as opposed to investing in technology itself and spending further time and money on upskilling employees.
What’s the difference between an acquisition, a merger and a takeover?
The terms “acquisition”, “merger” and “takeover” are sometimes used interchangeably but there are some quite significant differences between the three.
An acquisition is when a company purchases all or a portion of another company’s shares. They are usually amiable, with the target business’ board of directors approving the acquisition and the arrangement benefiting both parties.
Takeovers are often hostile acquisitions that happen when the target company doesn’t consent to the purchase.
According to Investopedia, “hostile acquisitions don't have the same agreement from the target firm, and so the acquiring firm must actively purchase large stakes of the target company to gain a controlling interest, which forces the acquisition.”
A merger is a mutual agreement whereby two companies come together to form a new legal entity, with both parties agreeing that they will be stronger and more successful together.
Points to consider before acquiring a business
If you’re considering pursuing an acquisition, you may want to consider the following as first steps:
Outline your goals – What are you hoping to achieve through the acquisition? Establishing your goals will help you choose appropriate companies to acquire.
Work in tandem – It’s a good idea to involve different members of the team (from various departments like legal, IT and marketing) in the process and seek professional help.
Set evaluation parameters – How will you know if a company is worth acquiring? Among other things, consider cash flow, debt, profits and the brand’s general reputation.
Establish a budget – How much are you willing to spend and are you realistically able to afford it? When acquisitions fail it's often because the asking price is too high for the buyer.
If your company doesn’t have enough capital to make an acquisition, you could consider taking out a business acquisition loan. Submit and enquiry through Funding Options to see how much you could be eligible for. A Finance Specialist will help match you with a lender based on your goals and circumstances.