Whether or not your company should participate in an acquisition depends on several factors, including your business goals. Whether your company is being acquired or making the acquisition, it’s an important decision that can affect your business for many years. Making the wrong choice could lead to losing consumer confidence, but making the right decision could lead to exponential growth.
There are several reasons why a company would want to acquire another company. The acquisition aims to improve one company’s performance to increase profits. They can also purchase a new company to prevent them from becoming competitive in the same sector and use their sales force to sell products to give their company a competitive edge.
In addition, companies being acquired may have something an entrepreneur wants, such as technology. For example, if you want to avoid developing technology yourself, you can buy a company that does. The goal of an acquisition is for both companies to succeed long-term.
But how do you know if an acquisition is best for your company? It depends on whether you’re being acquired or doing the acquiring. Both companies will have different goals.
Is an acquisition best for your company?
It can take time to determine whether an acquisition is best for your company, depending on its long-term goals. For example, if you built your company with the idea of one day being acquired and have an exit strategy, you’ve already built an acquisition plan into your overall business plan.
However, if you’ve never considered an acquisition, it may be exciting when someone wants to purchase your business. However, it effectively means you will no longer control your business, so you must weigh the pros and cons.
Should you acquire a business? Well, that all depends on what your goals are. If you plan to scale the business to increase its profits, you’ll still need to consider your experience, the customers, and how the company performs. If you’re an investor, you might acquire businesses and hire individuals to run them for you, but that doesn’t mean purchasing any business you’re interested in is a good idea.
Due diligence
Entrepreneurs must do their due diligence to investigate a company they want to acquire. Due diligence typically involves several team members, including financial advisors and lawyers, to ensure the company is worth buying. It may consist of the following:
Background checks
Background checks on the company and its management are crucial. You’ll need to identify if the company has good credit, ensure leaders are correctly identified and are who they say they are, and find out if there have ever been any lawsuits or criminal convictions.
Market research
While you may think what a company is doing is innovative, there’s no denying that customers drive the market, so you’ll need to do market research to determine whether an acquisition is a good opportunity.
Even if you’re already opening in the same industry, you should do market research to determine whether or not to acquire a company. Learning about your customers and the market, in general, can help you decide whether or not you can optimize the business for growth or if the business needs more growth potential.
Company values
When you acquire a company, you’re trying to increase your business’ value and promote growth. First, however, learning about a company’s culture and values is essential to help you identify any gaps you must address.
The culture includes everything from management style and ability to implement new ideas to how employees are treated, which can affect a business’s success. If you spot any issues on the ground floor with management, you may have to complete the business overhaul to make it successful in implementing new management training.
Brand awareness
The whole point of acquiring a business is using it to increase revenue. However, if no one knows about your target acquisition company, you’ll have to do much more work if you purchase it. In addition, if a company lacks brand awareness, it can be challenging to build it, mainly depending on the market segment. Ideally, you should only acquire businesses that are well-known in their markets and have good overall brand awareness to help you start turning a profit sooner.
Retaining the seller
If the business you want to acquire is already successful and purchasing them to access their customers and services, consider retaining the seller in some capacity and incorporating their business into yours.
Of course, you’ll need to ensure the seller wants to continue working for the company even when they don’t own it. In addition, you’ll likely want to retain the seller’s existing employees to ensure the company’s success. If the company is already doing well, the existing team may be vital to its health, especially during a major shift like an acquisition.
Sometimes, a seller may require their teams to be part of the deal, so you won’t be allowed to let anyone go for a set timeframe. Ultimately, the seller has as much control as you do, and if you truly want to purchase their business, they may have even more control, so you may need to negotiate before they are willing to sign documents.
Valuing a company
How much someone agrees to pay for a company can be challenging because the buyer wants to avoid overpaying. In contrast, the seller wants to undercut the value of their business. The valuation of a business can also affect the price of shares, so how much you pay can significantly impact your success.
You can value a business by looking at its finances for the last few years and making predictions. If the company has debt, you’ll need to consider it because their debt will become your debt if you acquire the company. You can discuss several valuation methods with a financial or business advisor to better understand a company’s worth.
Business acquisitions are complicated and require planning and expertise. Both parties should work with financial advisors and lawyers to help them reach a fair deal. If you’re trying to determine whether an acquisition is best for your business, consider your goals and whether or not an acquisition can help you reach them or set you back.
