Business acquisitions: how to take over another company

A company acquisition can be a fast track to business growth.

Like merging with another business, it can give you access to new customers, distribution channels, skills and knowledge, while putting more resources at your disposal (e.g. personnel, additional branches, intellectual property and so forth).

However, taking over a new business isn’t easy. It’s often messy and slow and involves an expensive formal process, known as due diligence.

There are also risks as merged businesses often face issues which can lead to a loss of business value if poorly managed.

Here are the key steps to start you on that road.

What is a company acquisition / takeover?

A company acquisition or takeover is where one company purchases most or all of the shares of another company, to become the majority shareholder or outright owner.

As majority shareholder, you can make decisions without the consent of other shareholders, so effectively run the business.

You may choose to absorb the acquired business into your own company and put your own branding in place, or keep its current identity and make it a sub-brand of your own.

Keeping its original identity may be preferable if good brand recognition and customer goodwill are among the target company's most important assets.

I’m thinking about an acquisition. Where should I start?

The first thing you need is a specific strategic rationale.

There should be a clear reason for making the acquisition of that particular company at that particular time.

If the reason for a merger or acquisition is vague, like ‘to grow the business’, it’s worth giving it more thought.

Your specific reason and objectives will ultimately be the driving force of all decisions around the acquisition, and will allow you to measure your success later, so be as clear on this as possible.

How to find a target company for takeover

The best way to choose a business for acquisition is to pick the one that complements your own most effectively. 

A badly performing business may represent good value – if you have what it takes to turn it around. Lots of large firms do this, but it’s a margins game.

Before attempting it, you need to be absolutely sure of your sums (speak to an accountant about those) and your capabilities.

Put simply, it is a question of looking at what your own business currently lacks but could benefit from - whether that is additional capacity, better systems and processes, supply chains, technologies, personnel, reputation, branding, customer goodwill or anything else.

You then have to calculate what these assets might be worth to your company, and whether this exceeds (in the long term) the costs and risks of any takeover.

Reasons to make an acquisition

Here are some of the main reasons why you might want to take over another business. In most cases, more than one will apply.

Your reasons should directly complement your current business goals – see ‘Your acquisition strategy’ below.

1. You believe you can improve the performance of the target company

A badly performing business may represent good value – if you have what it takes to turn it around. Lots of large firms do this, but it’s a margins game.

Before attempting it, you need to be absolutely sure of your sums (speak to an accountant about those) and your capabilities.

2. You want to remove excess capacity from the industry

If you’re in a mature industry in which supply is outstripping demand, acquiring a competitor gives you the opportunity to streamline the supply more effectively.

3. You can help the target company to penetrate the market

A smaller target company may be struggling to penetrate the market.

What they may be missing is your negotiating power – while you in turn can benefit from the particular qualities they have.

Together, you stand a much better chance of securing the big, lucrative contracts.

4. You want to acquire new skills or technologies

By acquiring a company with the skills or technologies that your business doesn’t have, you can expand or enhance your own product offering.

It can be far quicker, cheaper and more effective to acquire these skills and technologies than to develop them independently.

5. You see the opportunity to scale a scalable business

This is most applicable to smaller acquisitions, because many large companies are using all of their resources.

If your business is unable to improve margins by scaling down, it can be a smart move to acquire a smaller business and increase the team or equipment to reduce operational costs.

6. You want to pick a winner

If you can spot a young business with a huge amount of potential, it can result in a really lucrative acquisition.

Some of the most successful acquisitions involve a large company acquiring a startup business and helping it grow and develop.

This can be a winning strategy, as long as the target company can keep the magic alive.

In choosing your acquisition target(s), you will also need to consider your acquisition strategy.

Risks of making a business acquisition

As well as opportunities, there are many risks when making a business acquisition. Not handling these properly could lead to you losing money or damaging your reputation.

Here is a summary of the main risks:

Your acquisition strategy

Your acquisition strategy is, essentially, the sum of all your business reasons for seeking this acquisition.

You will need to be clear in your own business plan what the long-term goals of your company are, as this will help you choose the right strategy – and the right target for takeover.

The eleven basic acquisition strategies:

1. Sales growth

By acquiring other businesses, you can grow at a much faster rate than you could achieve through organic growth.

2. Regional growth

If you want to expand your business into new locations (or other countries), you can face many obstacles such as setting up new offices, warehouses, supply chains and staffing.

Buying a similar business in your desired location can be a way to have ready-made infrastructure in place.

3. Industry roll-up:

A roll-up is where you buy lots of small, similar businesses and ‘roll them up’ into one company.

When it works, this has the effect of combining their market share and thus dominating the market.

In practice, however, roll-ups are tricky to get right, as all the different businesses need to be aligned, harmonised and rebranded.

4. Diversification

If your company revenue comes mostly from one narrow source or market, you may want to branch out into other revenue streams to create greater security and risk tolerance.

You could do this organically, but a faster way is to acquire businesses that are already thriving in these other niches.

5. Full service

Similar to diversification, this strategy involves expanding your services or products to offer a broader range.

The way it differs from diversification is that the new products or services are inherently related to your core offering.

For example, if your business is hairdressing, then acquiring a beauty salon would be a move towards a full service offering.

6. Adjacent industry

Another variant on diversification, this is where you buy a business in another industry that is adjacent to your own.

Another example of an adjacent industry might be Nike entering the mountaineering market.

Initially selling climbing footwear, it then expanded into other climbing equipment.

7. Vertical integration

Vertical integration is where you buy up the businesses in your own supply chain, so as to have complete control over every stage.

This can produce greater efficiencies or synergies (see point 9) and may also be good from a branding point of view.

For example, if you produce health foods or luxury goods, it is an outstanding selling point to be able to boast that you oversee every stage of their production.

8. Product supplementation

This is where you identify a business that offers products or services that would complement or supplement your own.

You can thus quickly fill the gap in your own product line by taking over the target company.

9. Synergy

A popular buzzword, synergy is apparently short for ‘synchronised energy’.

In English, this can be summed up as simply, ‘Find the most efficient ways of working together.’

So for instance, if one company has an outstanding supply chain and another has exceptional distribution (but each lacks what the other has), combining the two will create good synergy.

The result should be greater profitability than either company could have achieved on their own.

10. Low-cost

One way to dominate a market is, quite simply, to be the cheapest option.

But in order to make a profit while selling your products at the lowest cost, you must achieve high sales volume (known as the ‘pile ‘em high, sell ‘em cheap’ approach).

Attaining this position quickly usually requires making multiple acquisitions of businesses that already have a good market share, and then working to achieve synergies (see point 9) between them.

11. Market window

Let’s suppose you see an opportunity to launch a brand new product or service, to catch a market trend and perhaps lead it.

The problem is, you can’t mobilise your own company to deliver it fast enough to optimise the opportunity – perhaps because you don’t have the expertise, resources or market positioning.

In this scenario, you might target a company that is in a more advantageous position, and achieve your vision through the acquisition.

How to analyse a company for acquisition

Be sure to do your homework on a target company before making your initial approach.

Here’s what you need to know:

How to analyse a business before you approach them

• Initial analysis: Review publicly available financial accounts, including profits and assets.

• Set your acquisition criteria: Include funding limits and risk appetite.

• Analyse the company’s market position and reputation: See if it would be a good fit.

How to analyse a business during the formal due diligence process

• Formal due diligence: Your team will analyse a range of information, including detailed accounts, tax position and contracts. They will also look for potential red flags that could hinder a successful integration. This stage is critical as not spotting hidden tax or debts could cause the acquisition to fail.

• Determine valuation: Use due diligence findings to adjust the price and identify any areas needing warranties or indemnities.

• Integration planning: Start planning how the business will be merged. Consider staffing, operations and cultural adjustment.

How should I go about making a business acquisition?

So you’ve decided to make an acquisition. Do you start by looking around at the companies that are available?

Wrong! That’s a reactive approach. Doing it that way would mean you only find a limited range of opportunities that might not be the best fit for your long-term business goals.

Broadly speaking, the correct approach looks more like this:

1. Set a strategy and identify target

Set a clear acquisition strategy, work out your funding capacity, identify a team of internal and external experts and create a shortlist of potential targets.

2. Arrange funding

There are a range of complex options including loans or equity stakes. Speak to a corporate finance specialist or an accountant.

3. Approach potential targets and begin negotiations

You will need to identify a lead negotiator, usually the CEO, as well as legal advisers and accountants.

4. Due diligence

This is arguably the most important stage.

Your team of external experts will work to determine the market value as well as assess the market, customers, staff and systems.

5. Legal documentation

The team will negotiate a contract including the price, structure of the deal, conditions and indemnities.

6. Completion and integration

This is often the hardest stage and where many acquisitions fail.

Your team needs to continue working on integrating the two businesses, including addressing staffing, operational and cultural issues.

Obtaining funding for business acquisitions

Acquisitions are expensive, so it is likely you will need additional funding to achieve one (often known as 'corporate finance').

Some accountants are corporate finance specialists and can help you obtain the funding you need.

You will need a strong new business pitch to demonstrate how your company will thrive post-acquisition and repay the investment.

Ultimately, the golden rule of acquisitions is ‘Be 100% sure of why you are doing this’.

With your specific goal fixed in your mind, you should be able to press on through each challenge even when things aren’t going your way.

Now find out about mergers and how they’re different from acquisitions.

If you found this article helpful, make sure to have a look at our article all about how to buy out a business partner, too.