Could Your Business Benefit From A Business Acquisition Or Merger?
Businesses have to grow, and a merger or acquisition can be an excellent way to do it. It’s often the preferred method of growth for large companies that acquire smaller ones since it can give them access to more resources and new ideas quickly.
Starting your own company from scratch is difficult because you’re not only tasked with identifying a good idea and raising money to support it, you have to manage the entire thing all on your own. Acquisitions provide you with a business in which you know there is value, rather than one which has yet to prove itself.
Acquisition vs. merger
A merger or acquisition (M&A) is an agreement between two businesses that combine into one entity. Although the term is used in conjunction with each other, they have legal definitions.
A merger is when two companies join together to form one new entity, an acquisition occurs when one business takes control of the acquired company.
A business acquisition is when one company buys most or all assets or shares of another company. Purchasing more than 50% of shares or other assets will give you control to make decisions of the acquired entity without the need of approval from other shareholders.
A business merger is when two companies combine to form one new company, usually mutually agreed on. The two companies involved are normally around the same size and scale of operations. Agreeing on a merger is normally based on the belief that the two companies hold significantly more value together rather than independently.
A merger usually involves a no-shop clause. This is an agreement that gives the buyer leverage, preventing the seller to solicit other offers within the no-shop clause agreement.
A vertical acquisition refers to one business merging with another, that produces separate products or services but along the same supply chain, such as its supplier or retailer.
A horizontal exchange is between two companies within the same industry, that are in direct competition with each other, in terms of product lines and markets. This can help reduce competition.
A conglomerate refers to one business merging with another in a completely different sector, while a congeneric is buying a company in a similar industry but offers different goods or services.
Why consider an acquisition or merger
There are many reasons why you want to consider implementing an acquisition or merger as part of your business strategy. We’ll list a few below.
If you’re thinking of expanding into another country, a great way is by buying a company from the said country. Rather than working from the ground up, purchasing a business will mean you already have the equipment, assets, team, and brand established — saving you a lot of time and hassle. This gives the buyer a much-needed head start in a foreign market.
Improving cash flow
A merger or acquisition can aid in reducing costs and increasing profit, improving the business’s overall cash flow. Savings come by economies of scale as you can have more buying power as you scale a business. The cash flow refers to the movement of money in (through income) and out (through expenses) within your company.
Growth and scaling
An acquisition or merger is great if a business’s growth is stagnant. Whether a company is restrained by limited resources or logistics, buying another company may resolve these obstacles. Incorporating new companies into your revenue stream has substantial potential for improving profitability.
Working alongside another company, especially one in the same industry, is a great way of decongesting the market. An acquisition can optimise your capacity and eliminate competition.
Amongst other beneficial resources, you can also gain new technology through the purchased company that has already implemented it. This can be a cheaper alternative than rather than investing in that technology from scratch. Additionally, you will now have gained a labour force that is familiar with this technology and skip the disjointed training stage.
Synergy is the basis that the combination of two companies holds greater value and performance than the individual parts. This is a concept that is mostly exclusive to the M&A process as it is the driving force behind a merger.
Choosing the right company
There are a lot of factors to consider before deciding on the best candidate for your acquisition or merger. Amongst many things, this includes if the price matches the target company’s value, and how good is the company’s financial health.
Decision-making during this period is critical and is the best time to hire a professional accountant and CFO for vital insight. At Wilkinson Accounting Solutions, we are a business accounting firm where you can outsource a professional CFO that specialises in providing quality acquisition advice.
To learn more about our CFO services designed specifically for the M&A process, get in touch with us today. You can contact us either by email or by calling +447843559414.
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