Acquisitions - how to take over another company

First published 24 October 2017 • Updated 11 September 2019

Acquisitions - taking 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). A business acquisition may also help you to develop your own products or services.

But with such a great opportunity does come risk. There’s no magic formula to guarantee a smooth ride, but with a considered approach you can keep the risks manageable. 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 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.

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.

For example, 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.

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.

  1. Investigate the business’s finances

    You’ll want financial statements for the past five years, preferably audited. See if they’ve been growing, and also explore their cash flows and working capital.

  2. Check out their assets

    Find out what assets belong to the company itself, e.g. buildings, plant, equipment, vehicles, land, and also any brands and goodwill. Make sure you know exactly what you’re getting.

  3. Look at their liabilities

    Liabilities include not just debts but also taxes, the salaries of employees, contractual obligations and any ongoing legal proceedings. Also find out if you need any special permits or insurance.

  4. Ask: how do we benefit?

    Finally, identify all the areas that will complement your existing business, including areas of synergy (i.e. ways that it will make both businesses more efficient).

How should I go about it?

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:

Pick a team. Within your company you should have a working group with representatives from each area of the business. They need to be able to work together and communicate clearly from the off.

Make a plan. Why are you doing this? What are your specific objectives? How will you finance the deal? Consider the list of goals above and make sure your plan is designed to meet at least one.

Name a price. Value is a tricky thing, and it’s hard to nail down what the right acquisition is worth to your company. You need to understand the financials inside out, which is when a good accountant is essential. A solicitor will help make sure your contracts are watertight, and you’re also need to think ahead about how you’ll raise funds if you need them.

Approach. Once you've got your plan and your optimal price tag for your acquisition, it's time to identify potential targets and make your approach. A phone call is the best way to begin, as it comes across as more personal, committed and bold, and so helps to build trust from the outset.

Ultimately, the golden rule of acquisitions is ‘Be 100 per cent 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.

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About the author
Nick Green
Nick Green
Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.