Acquiring a company can signal new and exciting times for you and your business. After all, being in a position to acquire another company means your own business is probably doing very well financially and has room to expand.
While the desire to acquire a company may be exciting, the process is often not. For that reason, it’s imperative that before you start your corporate transaction, you consider every aspect of the acquisition process.
In short, you need to think about the reasons why you want to acquire another company and how you will go about it before you and the other side agree to sign a final contract.
In this article, we will discuss the main factors you need to consider when acquiring a company to save you a significant amount of time and money in the long-run.
1. Why Do You Want to Acquire a Company?
The first thing you need to consider is why you want to acquire another company. Simply wanting to expand your business is not a good enough reason in itself.
This is because the goals you’re trying to achieve will have a massive impact on the type of business you target and the structure of the acquisition. In some cases, defining your goals will highlight the fact that an acquisition isn’t right for you, and that other options, like a merger, could be more appropriate.
Perhaps the other company is a small but up-and-coming rival, and you want to ensure they don’t gain enough traction to become a serious competitor.
Another reason could be you want to absorb a supplier to increase the efficiency of your own business. This is particularly useful if you tend to outsource your work due to lacking the necessary assets yourself.
To acquire another company there must be something about that business that will truly benefit you once you take over it, otherwise you could be spending a huge sum on a company that offers little in return.
If you know you want to grow your own business through an acquisition, but you don’t have a specific company in mind, understanding your goals will allow an experienced mergers and acquisitions solicitor to draw up a list of potential candidates for you.
2. Have You Planned Your Negotiations?
Once you’ve found a business you want to acquire it’s time to move onto the negotiations. What’s important to consider here is that negotiations aren’t just about price. There are a myriad of factors that need to be taken into consideration, so having a plan is key.
One of the most important elements to consider is how you’re going to buy the company. When going through an acquisition, there are two types of purchase agreements you will need to consider: share purchase and asset purchase.
The reason this should be considered early is because the type of transaction you choose will influence how much risk you take on when acquiring the company.
While buying a business comes with some risk even at the best of times, you can mitigate it by purchasing assets, not shares. This means you buy items, such as equipment or intellectual property from the business, not the business itself.
That leaves any risk from disgruntled ex-employees or suppliers with the previous owners, meaning you don’t inherit their liabilities.
This is a massive benefit, but if the current owners are not offloading their positives as well as their negatives, they’ll likely want a higher price. Weighing up whether you’d rather spend more to eliminate risk or vice versa can and should be considered well ahead of time.
This is just one element that will need to be decided on during negotiations. If you go in unprepared and unsure of what to expect, you place yourself at great risk of coming out on the wrong side of the deal.
3. How Will You Document Your Progress?
Business acquisitions are long affairs, and as more and more information surfaces it’s easy to feel like you’re having the same conversations over and over again.
One of the ways to combat this is by making sure you’re documenting your progress. The best tool for this is a heads of terms agreement.
A heads of terms is an agreement in principle between you and the business you’re trying to buy. While not usually legally binding, the document details what you’ve agreed during your negotiations.
That way, you can draw a line under the negotiation phase and move onto the next step in acquiring the company with all parties firmly on the same page.
Even better, agreeing a heads of terms with another party is a huge statement of intent. By doing so, both parties signal that they’re serious about seeing the transaction through.
Furthermore, while a heads of terms agreement is not considered legally binding, it can include a confidentiality agreement, so completing this step allows you to move forward and share any sensitive information.
Therefore, having an agreement in place is a wise decision if the acquisition falls through, as neither party can use information brought up in the negotiations for their own gain or to damage the other.
4. Are You Protected?
Over the course of the negotiations, you’ll learn how much the target company is worth. Conducting thorough due diligence will authenticate the evaluation and it gives you a chance to make sure there are no reasons as to why the acquisition should not take place.
Due diligence involves combing through the information passed on from the seller to the buyer to see how accurate it is. This includes:
- Checking the target company’s financial records
- Checking to see if the target company is in debt
- Checking to see if the target company has been taken to court and why
Any business that tries to hide its past is probably not going to be a worthwhile company to acquire, as it’s possible that more issues could arise and become your problems once the transaction is complete.
Due diligence is one of, if not the most, important parts of the acquisition process, so it needs to be handled by a professional corporate solicitor who knows what to look for and how to spot any red flags.
5. Have You Hired an Expert Solicitor?
It goes without saying that the acquisitions process is not a simple one. From finding a suitable business to take over to arranging the purchase agreements, a lot of work goes into making the process a smooth and profitable one.
Therefore, it pays dividends to have a solicitor with extensive experience in acquisitions on your side. This will help take some of the pressure off your shoulders, as your solicitor will make sure to ask the key questions during negotiations and check the heads of terms are fair.
If you have been considering acquiring a company recently to expand the growth of your own business, get in touch with a member of the Glaisyers team today for more information on how to take the right route.Back
Akbar is head of our Corporate department. He has experience in transactional mergers and acquisitions, advising clients from owner managed and SMEs to large corporates, and has the ability to provide expert advice and oversight in complex negotiations.
Akbar Ali - Head of Corporate, Operations
To discuss how Glaisyers can assist you contact Akbar Ali on Akbar.Ali@glaisyers.com or via 0161 832 4666.