Updated 31 May 2022
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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 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.
Be sure to do your homework on a target company before making your initial approach.
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.
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.
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.
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).
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.
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 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.