Business acquisition is the process of acquiring a company to build on strengths or weaknesses of the acquiring company. A merger is similar to an acquisition but refers more strictly to combining all of the interests of both companies into a stronger single company. The end result is to grow the business in a quicker and more profitable manner than normal organic growth would allow.
- 1 Process
- 2 Single business acquisitions and split and sell
- 3 Affiliate acquisitions
- 4 Risks
The process begins with defining the type of business that would make a good acquisition. Generally businesses within the same segment or a highly complementary market segment are targeted. Once defined the target business is approached and if interest is shown due diligence is performed to ascertain the financial and other conditions of the business.
When the financial terms are agreed upon, and the contract is signed the merger portion of the acquisition begins. Overlapping processes, personnel and products are evaluated and the better-performing pieces are retained.
Single business acquisitions and split and sell
A single acquisition refers to one company buying the assets and operations of another company and absorbing what is needed while simply discarding duplicated or unnecessary pieces of the acquired business. “Split and sell” acquisitions involve buying an entire business in order to gain one or two pieces of the business. The acquiring business may wish to retain the customer list and a product line, while moving manufacturing and other production related duties to an existing line. In this case the excess is often sold off to recapture some of the acquisition cost.
Businesses that use affiliates to sell and market their products may find themselves in the position of losing control of the marketing portion. This presents a danger as the entire business cycle is dependent on the sales cycle, which is now external to the business. In this scenario the acquiring business may be forced into paying a premium to the affiliate, to regain control of the process without upsetting current customers and cash flow. In rare instances the affiliate will gain so much influence that it can purchase the parent company.
There are many risks related to business acquisition and a number of mergers or acquisition fail ending up inducing higher operating costs. There are a set of criteria that are usually followed to know if a business is a good target for acquisition such as : having operative processes, a profitable and documented customer acquisition strategy, good profits, a good customer retention strategy, etc.