Is a business acquisition the best option?

Acquisition is only one of many alternatives for growth. Before committing to a business acquisition strategy, consider some of these quasi integration strategies:

• purchasing a licence
• forming a strategic alliance
• franchising
• participate in a joint venture.

The advantages of acquiring a business may include:

• Revenue enhancements from improved marketing, less competition, established products/services and customers, experienced staff, capacity to enter new markets and greater muscle when seeking large corporate or government customers through tendering opportunities,
• Cost reductions from economies of scale and the capacity to make better use of existing resources
• Utilise the research and development capabilities of the acquired company
• Risk diversification through having either a broader geographic operation, the capacity to diversify into different customer segments
• Tax gains from transfer of operating losses, unused debt capacity and lower cost of capital

Due diligence of a business acquisition

Due Diligence is a process undertaken by a buyer of a business in order to determine the attractiveness, risk and issues of that potential acquisition. The due diligence can be either external (assessing the future potential of that company in a competitive marketplace) or internal (assessing the key legal, financial and managerial issues within the company).

As part of the Due Diligence process it is also important to ascertain:

• Why the owner is selling
• The profitability of the business
• The cashflow of the business
• The track record of the business in winning and retaining customers
• Whether the owner wants cash rather than shares
• The funding implications impact on cashflow.

To determine whether there is a good “fit” between the existing and acquired businesses, consider:

• Whether accounting and other software, administration systems and procedures can be integrated or kept separate?
• How would new staff be integrated into the existing business?
• Whether both businesses can be accommodated in the same premises?
• What improvements could be made to the business to increase the value of the investment?
• What synergies (benefits and cost savings) will there be in acquiring the business
• How the acquired business would be managed?
• How the acquired business would be integrated into the existing business, or would it be managed as a separate entity?

Buying a business is a significant step. Contact an accountant, solicitor or your local Business Advisory Service for advice on the implications of a business acquisition.

Other important issues

When purchasing shares in a company, as opposed to buying the assets of a business, the debts or liabilities that later arise (even if they relate to events before the shares were acquired) are still the company’s responsibility.

• It is possible to negotiate a legal indemnity to cover any debts with the seller of the shares as part of the purchase contract.
• It is possible to negotiate a “restraint of trade” or “management earn-out” agreement to protect the goodwill investment of the acquired business.
• Preparing a business transition plan can address the issues and challenges that arise in acquiring a business.
• Consider how you will raise capital (create a link to new GROW/Business Strategy & Planning - Raising capital to fund the acquisition Page) to fund the acquisition.
• Be aware of the legal considerations of employers involved in a merger, takeover, acquisition or joint venture. In the event that a business or part of a business with an existing employee base transfers to a new employer, awards and certified agreements applicable to those employees may be binding on the new employer. This may in turn have considerable financial implications for the new employer.