Acquisition is the process of one business buying another business. It’s a form of growth, but it’s different from organic growth, where sales and revenues are increased from within by generating more (and higher-value) leads.
I’m a strong believer in business acquisition as a way to add value to a brand, and it’s a strategy I’ve built into my own business plan for Stada Media. I discuss this in more detail in The Diary of an Entrepreneur S3 E4.
What is acquisition in business?
Before we go any further what does acquisition mean? In simple terms it is one business buying another business, but there are some caveats to that. For example, you might acquire a company’s intellectual property but not its physical assets, or you might acquire its assets but not its personnel.
In more technical terms, an acquisition may occur when one business purchases more than 50% of another company’s shares, giving it a controlling stake. There are several different terms for acquisitions, with slightly different meanings:
- Acquisition: One business buys another business, usually amicably.
- Takeover: One business buys a controlling stake in the other, often hostile.
- Merger: Two businesses combine into one, usually completely new entity.
Hostile takeovers can be problematic, so it’s generally a good idea to negotiate an amicable buyout if possible.
Understanding the reasons for business acquisition
There are lots of reasons for business acquisition, and I’ll touch on some of them when I look at the various types of acquisition below. But the big reason is growth. Ultimately, all acquisitions are geared towards building your business by putting a big building block on the side of it.
The various types of acquisition
There are many different types of acquisition, and the names are often not self-explanatory. Four of the main types are:
Horizontal acquisition means acquiring another company operating in broadly the same space as your own – a competitor buyout. You gain market share and will usually gain the vast majority of the acquired company’s customer base.
Vertical acquisition means acquiring a company up or down your supply chain. For example, a wholesaler might acquire a retail business in order to sell direct to consumers. It’s a good way to give you control over more of your supply chain, and new routes to market.
Congeneric acquisition is about being able to serve as a one-stop shop for your customers, by acquiring businesses that cover all of their needs. An example of this is the way telecoms providers grew to offer bundled contracts including telephone, internet and the necessary hardware to get a new connection up and running.
Conglomerate acquisition is the opposite of all of the above: instead of acquiring a complementary business to your own, you purposely acquire a completely non-related business, as a way to diversify and spread your risk.
What are the challenges of business acquisition?
Running a business isn’t always easy; it takes constant management, care and attention, as regular subscribers to my podcast The Diary of an Entrepreneur will know. Company acquisition can be challenging too, as you’ll need to do your due diligence before investing significant company funds into an attempted buyout.
Detailed cost-benefit analysis is a good way to determine whether an acquisition is worth it. Look at the potential spend and what you expect to get from your investment, including areas like:
- The acquired business’s finances (cash flow, working capital)
- The acquired business’s assets (including brands, IP and goodwill)
- The acquired business’s liabilities (debts, trade credit, payroll etc)
Finally, identify the ways the acquisition could benefit your own organisation and set these against the costs to decide whether it’s worth the risk.
The struggles of finding a business acquisition
To acquire a business amicably, you’ll need to find an owner willing to sell. That can mean paying a negotiated price per share, or acquiring a company that is in the process of failing, in order to turn it around as part of your own brand.
Sometimes it can be difficult to find an acquisition that’s a good match for your business at all. Be led by your own business goals and look for opportunities that will fill in gaps, enhance your capabilities or give you access to IP you don’t already own.
How to create a company acquisition plan
Your company acquisition plan should include the reasons for pursuing the acquisition, as well as the intended objectives and outcomes from the deal. If the expected outcomes don’t align with the goals, you need to go back to the drawing board.
An acquisition plan is also a good place to include details of any business acquisition financing, whether that’s spending your organisation’s own money, external funding raised from stakeholders and investors, or taking on a business loan that will be paid back with interest at a later date.
Important things to consider after acquisition
Acquiring a business (usually) isn’t as simple as changing the brand name and leaving everything else as-is. There’s usually an integration process and a transition period. Not all existing employees might decide to stay, so watch out for talent attrition following the buyout.
There can also be culture shock, if your management style differs significantly from that of the previous organisation. Engage with any transferred employees and make sure you listen to their concerns, to try to hang on to the expertise you have paid for.
I strongly believe that buying another business is an excellent way to fuel growth, not as a replacement for organic growth, but working in tandem with it. To keep up to date with my own future acquisitions, follow my video series The Diary of an Entrepreneur where I share my own business journey in detail.
To talk more about anything I’ve mentioned in this article, please get in touch.