What exactly happens when one business decides to buy another?
This process, known as a business acquisition, occurs when one company takes control of another by purchasing most or all of its shares or assets.
An acquisition or merger are two primary ways a business can ‘exit’ the market. In some cases, entrepreneurs grow businesses specifically to be acquired, netting shareholders a quick win in agile markets like technology.
Read this guide to learn more about the business acquisition process.
Understanding business acquisition
Business acquisition is when one company purchases another. This is typically achieved by buying most of the company’s shares or assets.
The goal of most mergers and acquisitions (M&As) is to expand a business, access new markets, acquire innovative technologies or increase a market share.
In the construction, engineering and technology industries, acquisitions can offer quick access to new resources, customers and competitive advantages.
Making a profitable business sale is the dream for some entrepreneurs, and many startups deliberately position themselves for acquisition as an exit strategy.
Startups often innovate in niche areas or develop unique technologies that larger, more established companies find attractive.
By focusing on creating value in specific areas, startups make themselves ideal targets for acquisition.
Key approaches for acquiring a business
So, how is a business purchase transacted? There are two key exchanges: share and asset purchases.
Share purchase
A share purchase is one of the most common forms of business acquisition. This involves the acquiring company buying a majority stake in another company’s shares.
By doing so, the acquirer gains control over the operations, decisions and assets of the target company.
This allows the acquiring company to leverage the existing brand, customer base and operational setup of the target company.
Asset purchase
Another approach is an asset purchase. This is where a company buys specific assets from another company, such as technology, patents, customer databases or even brand names.
This method is particularly relevant for companies looking to acquire specific capabilities or assets without the extra admin of taking over the entire company operations.
For example, a tech company might acquire another company’s patented technology to enhance its product offerings without integrating the entire workforce or operations of the target company.
Challenges and strategies in acquisitions
Business acquisitions can be complex and challenging, posing potential legal and financial obstacles. As a result, due diligence processes are absolutely paramount for both the prospective buyer and the target company.
Overcoming legal and financial hurdles
Acquisitions are often entangled in a web of legal and regulatory requirements.
Navigating this terrain involves dealing with antitrust laws, ensuring fair and accurate valuation of the target company, and confirming the financial viability of the deal. To combat these challenges:
- Expert consultation: Engage experienced legal and financial advisers who can provide insight into complex legal structures and financial arrangements. Their expertise will help identify potential risks and ensure compliance.
- Comprehensive valuation: Conduct thorough financial analyses and valuations of the target company to ascertain its true market value and uncover any hidden liabilities or risks.
Cultural integration
Merging two distinct corporate cultures can be delicate, requiring communication and planning. This is also called ‘change management’.
- Cultural assessment: Perform an in-depth analysis of each company’s culture to identify potential areas of conflict and synergy.
- Inclusive communication: Implement a communication strategy that includes employees, customers and investors to ensure everyone is informed and their concerns are addressed.
- Change management: Develop a change management plan that focuses on easing the transition for employees, helping them adapt to the new corporate environment.
Best practices for successful acquisitions
Strategic alignment and thorough preparation are imperative to ensure an acquisition is successful. Here’s a non-exhaustive list of best practices:
Comprehensive due diligence
Conduct a detailed investigation of the target company’s financial health, operational efficiency, cyber security controls and market position. You should also consider whether they have risky operations in regulated sectors or specific jurisdictions.
Integration of financial systems
Plan for integrating financial systems and processes to ensure a seamless transition in managing finances post-acquisition.
Financial planning
Develop a robust financial strategy that includes securing funding for the acquisition and managing the combined entity’s finances.
Effective communication strategy
Establish clear, transparent, and consistent communication channels with all stakeholders, including employees, customers and investors, to create trust and collaboration during the transition.
Leadership and team integration
Ensure smooth integration of leadership and teams from both companies. This involves aligning managerial styles, setting common goals and facilitating collaboration among team members.
Post-acquisition evaluation and adaptation
Regularly evaluate the success of the acquisition and be prepared to adapt as needed. This helps identify improvement and ensure the acquisition aligns with the company’s objectives.
Conclusion
As we can see, there are plenty of moving parts to get right when it comes to business acquisitions and mergers.
Rather than treating an acquisition like a straightforward financial transaction, we must appreciate that real people and company cultures are involved on both sides.
By developing genuine understanding and empathy between leaders, transparently communicating with employees, and prioritising collaborative integration, companies stand the best chance of thriving from an M&A.
If you’re considering some form of M&A and need advice on procedures and due diligence, contact PBA Accountants. We can help you discern primary considerations and what steps to take to move your deal forward.