In this unstable and vibrant corporate world, business acquisitions are the key turning point that shapes the business expansion and employee functions. Though the term is widely used throughout the world, it hides the major challenges and decisions in its transactions. In this article, we will provide you with a clear understanding of the term business acquisitions, its meaning, the objective behind it, its pros and cons, the steps involved in this process, and its types, which support the reader in identifying its significance in today’s business landscape.

What is Business Acquisition?

A business acquisition is a business transaction in which an acquiring company purchases all or a majority of the shares of a target company to gain control over that company. They are most common in business, and it is not essential that they occur only between large companies; they are actually common in small and medium-sized businesses. Sometimes it is supported by both parties, whereas it may occur without the consent of the target company as well. Usually, there is no shop clause during the process of approval.

Understanding Acquisition –

It is a financial trade in which one company acquires control over another company by purchasing all or the majority of the shares of the target company. There are several objectives behind it; the primary goal is to gain control over the target company’s operations by buying its assets, gaining control over the production functions and other resources, increasing market shares, achieving economies of scale, diversification, boosting synergy, reducing costs, and entering new product lines and the customer base. The major benefit is cutting out the competition.
Usually, they are friendly initiatives and take place only when the target company’s board of directors gives approval for the deal and agrees to be acquired. Often, they refer to mutual work that results in the growth of both the acquiring and the target company.
Both companies involved in this process develop combined strategies to ensure that the buyer acquires the right assets and investigates the financial reports or related valuation for obligations that have a direct relationship with the assets. The business acquisition process is complete only when both parties approve and fulfill the legal stipulations.

Key Insights –

• A buyer gains control over the acquiring company only when it buys more than % 50 of the target firm’s shares and other assets, with or without the approval of the acquired company.
• Business acquisition is carried out with the support of investment banks, since it is a complex process of financial transaction and often includes legal and tax implications.
• It is closely connected to mergers and takeovers; however, a business acquisition is often friendly, but a takeover may be hostile.
• The merger creates an entirely new entity originating from two separate companies.

Business Acquisition Process –

A business acquisition process starts with an objective and ends with the deal closure.
1. Set a motive: Before entering into the business acquisition process, it is necessary to start with questioning “why.” The objective behind the business acquisition is considered in the following categories:

• Diversification
• Efficiency
• Leverage
• Economies of scale
• Transformation
• Scope
• Transformation

Identify which of these reasons actually drives your objective behind it. If your answer includes a few reasons from the above section, it’s fine, but having too many in the list can make it difficult, and you will end up with unclear and unfocused thinking. It will create confusion and make it tough to decide, and you may end up buying the wrong business. Be clear with exactly what you want and stay committed to it throughout the process.

2. Find the search Criteria: Your research criteria for the target company should directly highlight your objective, and hence, it will support your business acquisition strategy.
You can consider the following things:

• Which markets should the target be operated in?
• What kind of customers should it serve?
• What kind of synergies (if any) are you looking for?

Instead of directly rushing into research, prepare a list of specific questions that will help to speed up the research and also make it more effective.
Note: Before stepping into the search process, fix your financial limit, i.e., set a financial limit for up to how much you can spend. There is a chance that you may get attracted to the businesses that are just above your budget, as compared to those within it. It may have a higher market share, a good product line, or a stronger management team. The suggestion here is that, if you can’t afford it, don’t go for that.

3. Conduct in-depth research: Just like Redfin in real estate, in the world of M&A, there are numerous online databases where business owners and bankers list the companies for sale. Which database should be considered depends on the size and the geographic factors of your business. However, signing up for various databases will help broaden your research area and help you select the right target.
These sources help you in discovering the correct potential business acquisition target and also provide you with the knowledge of what is currently trending in the market, the types of businesses available for sale in the market, and their purchase price range. This action supports you in making informed decisions and understanding the competitive landscape within your industrial sector.

4. Start the outreach process: If you choose to contact a business that you have found through your search in the M&A database, you will usually start by contacting their banker, as they are the gatekeepers. This individual act will assess your genuine interest in the company before sharing any confidential information with you.
The company will ask you to follow the standard procedure, i.e., to sign an NDA agreement (non-disclosure form) before providing you with the detailed memorandum of the business containing the business outline and its history of financial performance.
Local small businesses are, however, not likely to be listed online for sale, but if you are interested in discussing an offer with them, there is no definite approach. You can approach through your lawyer to check whether they are ready for a potential takeover, or you can reach out to the owner of the business directly. Be clear about your objectives, but do not reveal the strategy behind the business acquisition.

5. Plan intro meeting: The first introduction meeting offers you an opportunity to meet directly with the business owners and develop a good bond with them. In case the deal is closed by acquiring this business, they may serve a vital role in the collaboration of the two businesses, so building a good rapport is always beneficial for both companies.
These kinds of meetings help you to determine and understand the company’s working culture, such as its functioning, what are the factors that contribute to its success, and how the performance of the employees is evaluated and then rewarded.

6. Make an offer: After you are finished with your investigation process and have collected sufficient information about the company that makes you confident, then this is the right time to make an offer. Your offer should showcase your purchase criteria, market comparisons (like what kind of EBITDA multiples are available in the market for similar companies), and the price range the owner would accept.
One more thing that should be considered while making an offer is to respect the expectations of the company owner. For instance, if you offer lower business valuation rates in comparison to its actual valuation rate, it will seem like an insult and may impact future negotiations. If you acknowledge that your valuation rate and the owner’s expectations are too distinct, then be genuine and don’t waste the time of both parties.

7. Conduct due diligence: If the client or company owner accepts your non-binding proposal, then you can move forward with the due diligence stage. The due diligence process usually takes three to six weeks for small- to mid-sized companies, and for large-sized businesses, it may take from three weeks to three months; it is purely based on the size of the company.
Make proper utilization of this period, as it is the final chance to detect any flaws or uncovered problems. Well, spend more time understanding the function of business. Once the deal is sanctioned, it will help you in running the business smoothly and fulfilling your targets.

8. Close the deal: Closing the business acquisition deal will require some guidance from your lawyer in preparing the important documents, such as

• Operative trade agreements, like stock purchase agreements
• Legal statements
• Regulatory licenses
• Proof of third-party approval
• Documents of payments, such as stock or cash
• Ancillary agreements
• Final binding offer
• Terms of funds transfer

If everything goes well and smoothly without any complications, then you can step into the last phase of integration.

Types of Business Acquisition –

Business acquisition takes place for several reasons and in various ways.  The most common types are as follows:
1. Horizontal Acquisition:  It takes place when a parent company buys another firm or competitor that offers the same products and services and is working in the same supply chain.
For example, when one streaming service provider buys another streaming service provider, it is called a horizontal acquisition.
Real examples – 

• Microsoft bought Activision Blizzard in January 2022.
• Disney acquired Hotstar and became Disney+ in 2019.
• Facebook’s acquisition of Instagram in 2012 for $1 billion and WhatsApp in 2014.
• Marriott International is building the world’s largest hotel chain by acquiring Starwood Hotels and Resorts worldwide in 2016 for $13 billion.

2. Vertical Acquisition: It occurs when a parent company buys another company that provides services in its existing supply chain, either upstream (vendor or supplier) or downstream (wholesaler or retailer).
For example, when a streaming service provider buys a film or television production company, it is called a vertical acquisition.
Real-world examples – 

• Amazon, a giant online retailer, bought grocery store Whole Foods Markets in 2017 for $13.7 billion.
• CVS Health Corporation acquired Aetna in 2018 for $69 billion.
• Disney, a powerful financial and distribution channel, acquired Pixar, an innovative animation studio, in 2016.

3. Conglomerate Acquisition: It takes place when a parent company buys another company from a completely different industry or sector, or a non-core business.
For example, when a streaming service provider buys a crayon company, it is called a conglomerate acquisition.
Real-world examples – 

• Microsoft bought professional networking site LinkedIn in 2016 for $26.2 billion.
• AT&T, a content distributor company, acquired Time Warner, a content-creating company.
• Berkshire Hathaway, a multinational firm, purchased Heinz in 2013 for $23.3 billion.

4. Congeneric Acquisition: It occurs when a parent company buys another company that provides different products or services but operates in the same or closely related industry and caters to the same customer base.
For example, if a streaming service provider buys a smart television manufacturer, then it is called a congeneric acquisition.
Real-world examples – 

• Zomato, a food delivery service provider, acquired Grofers and renamed it Blinkit, a 10-minute grocery delivery service provider.
• Coca-Cola purchased Glaceau, a Vitaminwater production company, in 2077 for $4.1 billion.
• Procter & Gamble Co., a consumer goods provider, purchased Gillette, a razor and battery company, in 2005 for $57 billion.

Distinguish Between Business Acquisitions, Mergers, and Takeovers –

The term M&A combines and forms “mergers and acquisitions,” which generally refers to the collaboration of two or more firms with the goal of optimizing market value and expanding the outreach of their business operation, acquiring more market share, reducing production costs, and boosting return.
The following are some major differences between business acquisitions, mergers, and takeovers.

Conclusion –

Business acquisition, whether it is a large or a small-to mid-sized acquisition, plays an important role in business expansion, acquiring a large market share, and building a strong competitive position. Every year, thousands of deals take place throughout the world, which indicates that industries do trust acquisitions, as it is the route towards growth. But the success is based on careful planning and research on the target company. By laying appropriate groundwork and ensuring a strong fit, it turns into meaningful opportunities that drive long-lasting value and business growth.

Frequently Asked Questions (FAQs) –

1. Why is business acquisition important?

• Business Expansion: It supports companies to expand their outreach in the new market and diversify their product scope.
• Synergy: A well-planned acquisition creates synergies, which reduces the expenditure and increases operational efficiency.
• Skill acquisition: It allows companies to access skilled professionals and expertise, responsible for boosting innovation and competitiveness.
• Market Expansion: It helps the companies to enter into the new market immediately with a pre-established customer base and distribution network.
• Risk Mitigation: It enables a business to diversify its streamlining and reduce dependency on a single market or product.
• Competitive Advantage: Acquiring or buying a competitor improves the market position of the parent company and helps the company to stay ahead in its own industry sector.

2. What are the drawbacks of business acquisition?

• Integration Challenges: It is a complex and time-consuming process, sometimes ending with cultural conflicts and functional disorders.

• Financial Risks: It causes strain on the companies’ finances because of purchase cost, debt, and potential write-offs.

• Strategic Fit: If they aren’t planned strategically may fail to create synergies, which leads to poor performance and loss of value.

• Compliance Challenges: Industries that require location-specific approvals and compliance may create challenges and complications in this process.

• Reputation Threat: A poorly executed acquisition may impact the target company’s value and image, which may create concerns in customers and stakeholders.

• Skilled Employee Retention: Sometimes, it may result in the loss of skilled talent within the target company.

3. What is the purpose behind business acquisition?

Business acquisition only makes sense when the acquiring and acquired companies both have a common goal of strategic growth. It requires transparent strategic objectives and specific criteria for assessing the potential targets. Usually, the acquiring company benefits, as it gets the chance to expand its product lines or services, uphold the share market by reducing the competitors, and requires lower production costs by acquiring the company that is already operating in its supply chain.

4. What are the factors that should be evaluated while getting into a business acquisition?

• Price: Determine the acquisition price by evaluating the company’s market value, growth potential, and strategic fit.
• Financial analysis: Conduct a deep financial analysis by calculating its income, net margins, and cash flow, to ensure that the business has sustainable growth.

• Legal disputes: Conduct a deep research on ongoing or potential legal obligations that may impact post-acquisition.
• Debt load: Calculate the target company’s debt to avoid pressure on your own financial health.

5. How much time is required to complete the business acquisition process?

Generally, business acquisition requires 6 weeks to 6 months or a year-long period, depending on the size of the business.