Most people know that to ‘acquire’ something is to take it into your possession. It is defined in the Oxford dictionary as an act to “buy or obtain (an asset or object) for oneself.” It’s a straightforward enough term that becomes a little more tricky when applied to the business world.

A ‘business acquisition’ is an event that happens worldwide multiple times a day, with the bigger ones usually making headline news. Put simply, a business acquisition is the process of buying a business or a majority share of a business and is a strategic move where a business owner or investor decides to purchase an existing business instead of creating a new one.

As someone who has been at the coal-face of many business acquisitions, in this blog, I share what typically happens during the process, the different types of business acquisitions there are, and cover some of the benefits and challenges in making a business acquisition

 

The Business Acquisition Process

Generally, when an acquisition occurs, the company to be acquired becomes a subsidiary of the acquiring company, and its owners become shareholders of the new group. Acquisitions can be completed for various reasons, such as to expand a product line or customer base, gain a competitive edge, or increase market share.

A business acquisition usually starts with a larger business identifying and approaching a potential target company, conducting due diligence, and then negotiating and signing a purchase agreement.

 

Due diligence is a critical phase of an acquisition and involves researching the target company rigorously, including evaluating its financial statements, legal documents, customer contracts, and other relevant information. Providing the acquiring company is satisfied with the due diligence process, and no hidden threats or risks are uncovered, the purchase agreement is finalised, the acquisition completes, and the target company is integrated into the acquiring business’ operations.

Once the purchase agreement is signed, the hard part begins, and the acquiring company must begin the complex task of integrating the target company into its wider business model.

 

Types of Business Acquisition

Business acquisitions are an important and common feature within the business world. Mainly, they involve two or more companies coming together to create a new company or to form a partnership. They can take many forms, but the most widespread acquisition types are acquisitions, mergers, and joint ventures.

 

Acquisitions are where one company purchases the assets, operations, and liabilities of another and absorbs them into its business model.

Mergers occur when two companies combine their assets, operations, and liabilities to form a new company.

Joint ventures happen when two or more companies come together to form a project that will be jointly owned and operated.

Mergers and joint ventures might sound similar (and they are), but they are two separate processes. In a merger, two companies amalgamate to form a single entity, with one of the companies usually remaining in existence while the other ceases to exist.

In a joint venture, two companies collaborate in order to attain a particular objective, such as the formation of a third company, the execution of an external project, or the promotion of complementary services.

All require careful consideration and thoughtful planning, and it is essential to consider the goals and objectives of the companies involved, the potential risks, and the desired outcomes. Ensuring that the proper legal and financial documents are in place before any business acquisition occurs is equally vital.

 

The parties involved in a business acquisition

The acquiring business: The acquiring business is the party making the purchase, and it must have the financial capacity to make the acquisition, as well as a strong understanding of the business to be acquired and its industry in order to make an informed decision.

Typically, acquisitions are part of a long-term vision for the acquiring business and are a means of gaining an edge in their industry. To ensure a successful outcome, an acquiring business should have a clear understanding of its goals and objectives and a knowledge of the industry and market trends they’re buying into. They should also have a strong team in place to lead the business post-acquisition, ideally with a strong track record of successful acquisitions and an ability to identify and mitigate business risks.

Motivation is also an essential factor. Generally, the acquiring business is looking for an opportunity to grow, whether through gaining access to a new market, diversifying its service offering, or positioning itself as a market leader. In some cases, the buyer may also be looking to purchase a business to acquire its assets, such as its customer base, technology, or intellectual property.

 

The acquired business: The role of the current owner or owners of the target business is to transfer ownership to the acquirer. As they have the ultimate decision-making authority regarding the sale, the acquiring business must understand the qualities of the seller and their motivations for selling.

A seller typically has a deep understanding of their own business and a clear view of the goals they wish to achieve as part of the acquisition. It is beneficial for them to possess a solid financial background, a proven track record of success, and the ability to negotiate the best terms for a transaction. Furthermore, the seller must be willing to provide the buyer with all the necessary information and abide by the current laws and regulations governing business acquisitions.

Ultimately, the seller’s primary motivation for selling is to maximise the return on their investment. This could include a substantial cash payment, future payments, a stake in the buyer’s business, or a combination of all three. By understanding the seller’s motives, the buyer can better assess the value of the acquisition and craft a more attractive offer.

Other Parties Involved: Several different parties become involved when a business acquisition begins. The most important of these parties are the buyer and the seller, who are responsible for negotiating the terms of the acquisition. However, there are also a number of other parties who can assist in the process.

• Financial advisers can provide guidance on the financial aspects of the acquisition, helping to ensure that the terms of the deal are fair and advantageous to both parties.
• Lawyers can provide support with the legal aspects of the transaction, such as contract negotiation and due diligence.
• Accountants can help to ensure that all financial information is accurate and up-to-date.
• Additionally, if the acquisition involves a large sum of money, valuation experts may be involved to assess the true value of the business.

 

Benefits of Business Acquisition

A business acquisition can be beneficial for both the acquiring and acquired companies, resulting in the following:

• Cost savings – gained by combining resources and eliminating redundant or unnecessary operations.
• Expansion of market share – achieved by the acquiring company taking advantage of the acquired company’s existing customer base.
• Increased productivity – through the utilisation of the acquired company’s technology and expertise.
• Consolidation of resources – resulting in a stronger competitive advantage and more efficient use of resources.

Business acquisitions can also result in more diversified portfolios for acquiring companies, providing opportunities for future growth and can thus be a highly beneficial process for businesses of all sizes in whatever sector they operate.

 

Challenges of Business Acquisition

Following a business acquisition, ownership, management, and control of the acquired business are transferred to the acquiring business. Ensuring this happens smoothly is a massive undertaking.

Throughout the acquisition process, several challenges can arise, such as regulatory obstacles that govern the acquisition of a business. Then there are the financial challenges, like understanding and assessing the financial position of the acquired company to ensure that it is viable and a good long-term investment. This necessitates thorough assessments of the potential risks the acquisition exposes and strategies that must be developed to mitigate them.

Among the more difficult challenges is that relating to culture. Different businesses possess different values, attitudes, employee behaviours, customers, and suppliers. Aligning these factors with those maintained by the acquiring company is perhaps the most crucial undertaking.

However, providing these challenges are recognised from the outset, and a comprehensive plan for the acquisition process is developed, an acquiring business can achieve the desired results.

 

Final Thought

A business acquisition is the process of purchasing an existing business from another party. It is a complex process requiring vigilant planning, meticulous due diligence, and the requisite financial resources to ensure the purchase benefits both parties.

It is also a process that demands a comprehensive understanding of the target business and its environment, the assessment of multitudes of data (much of it financial), strong negotiation skills, and an ability to navigate through reams of regulation, such as corporate governance, intellectual property rights, and other potential liabilities.

The challenges are significant and should never be underestimated. The risk of overpaying, the need to integrate two different entities, and the potential for unexpected issues to arise during the process are very real.

Though complex and, at times, stressful, the benefits of a business acquisition can be numerous and include the potential to acquire valuable assets, unique skills, and expertise and gain access to new markets.