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Guide: Exit Your Business | Strategy Five

Strategic Mergers and Acquisition

An acquisition is when a company purchases most or all of another company’s shares to gain control of that company. If the purchasing company gains more than 50% of the selling company’s stock and other assets, the purchaser can make decisions without the approval of the selling company’s other shareholders (because they are the majority shareholder).

Acquisitions are very common in business. We mostly hear about acquisitions of large/well-known companies because of the size of the deal and overall general public interest. However, mergers and acquisitions (M&A) occur more regularly between small to medium sized companies and larger ones.

Why Make an Acquisition?

There are many reasons why a company would want to merge with, or acquire, another company. They may want to diversify their products/services, increase their market share, reduce costs, introduce niche offerings on a much larger scale, enter a foreign market, or just reduce competition.

How Do I Start the Process of an Acquisition?

With all financial moves you make, it is imperative that you do your proper due diligence. Here are some things to consider.

  • Is the price right? There are many factors that go into determining both interest level, and the willingness to “pull the trigger” and buy. If an acquisition fails, it is often because of the asking price.

  • Examine the debt load. A target company with an unusually high level of liabilities should be viewed as a warning of potential problems ahead.

  • Undue litigation. Although lawsuits are common in business, a good acquisition candidate is not dealing with a level of litigation that exceeds what is reasonable and normal for its size and industry.

  • Obsess over the financials. A good acquisition target will have clear, well-organized financial statements, which allows the acquirer to exercise due diligence smoothly.

Frequently Asked Questions

Do you have questions about exiting your business? You should consider checking out our Resource Navigator. It houses the contact information of 400 of our most helpful partners from across the state who provide free to low-cost assistance to Iowa entrepreneurs and small business owners.

Q: What would make my company more likely to be acquired?

A: What makes a company attractive to investors or an acquisition entity really depends on their goals and opinions. Typically speaking, a company with a healthy cash flow and proven track record of success (including a stellar team) will likely be acquired before less healthy companies.

Q: What’s the difference between being acquired by a company and merging with one?

A: An easy way to break this down is to understand that merging with another company means there is likely a “level playing field” regarding the current management teams between each company. When a company is acquired, likely the acquired company will change to fit certain aspects of the acquiring company.

Q: Is acquisition reserved for large companies?

A: No.

 

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NOTICE: The information included on this website is to be used only as a guide. It is not intended to cover all provisions of the law or every taxpayer's specific circumstances.

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