Business acquisitions are techniques that companies use to buy other companies to increase their size and market share. The goal is usually to acquire other firms that have complementary products, technologies, or markets. Successful business acquisition strategies are based on three factors: the target company’s culture, the company’s financial position, value, and the target company’s management team.
The Reasons Behind Business Acquisitions
- The first reason is that the acquiring company wants to expand its business and needs more resources or expertise. For example, if a company has a lot of cash but not enough qualified employees, it might want to acquire another company that has more qualified employees. This way, they can get the team they need without having to hire and train their team.
- The second reason is that the acquiring company wants to take over its competitor’s market share and drive them out of business. A crude example is when “Company A” owns 80% of all car dealerships in the U.S. and “Company B” buys out “Company A” so it can take over those car dealerships and make “Company A” go out of business.
- The third reason is that the acquiring company wants to buy out all of the company’s assets so that it can own its brand name and keep it profitable in its portfolio. For example, “Company A” might be trying to buy out “Company B” because they have a better idea of what “Company B” should do with their product line and want to take over that strategy and make money off it themselves.
10 Steps to Prepare Your Company for a Potential Business Acquisition
1.Perform an internal audit: When properly executed, an internal audit can significantly benefit any company. Assessing the organization’s internal controls, corporate governance, and accounting systems is the goal of the internal audit. Usually, these audits will find something, no matter how small, that will help your business, even if an acquisition does not take place. Additionally, it shows potential buyers that your business is conducted professionally.
2.Make sure your business is systematized: Any business owner thinking about a sale soon would benefit from asking oneself this question: “How long would this firm continue its current level of performance if I had to leave it tomorrow?”, be sincere with yourself. Your business cannot survive without you if you think it would fail if you left. If you want to sell your company, it must be able to run profitably in your absence. Create a list of standard operating procedures so that anyone could step in and take your place tomorrow if necessary. Include what could go wrong, how these problems would be managed, and what could potentially go wrong.
3.Clean your balance sheet: Taking undesirable assets off the balance sheet does not constitute “cleaning up your balance sheet.” It is not advised to do that. Cleaning your balance sheet means making sure your balance sheet appropriately reflects your company’s current financial situation, is uncluttered, has a low level of debt, and doesn’t contain any of the outdated or non-performing assets that plague enterprises at the lower end of the market. You should handle ongoing balance sheet management as one of the issues in your internal audit.
4.Maintain your most important contracts: How long-term-oriented is your company? A decent rule of thumb is to determine how much of your operating income is attributable to your five largest contracts. The more sustainable your business is, the less reliant it is on any one contract for its continued existence. If your company’s top five contracts represent a sizable portion of its recurring revenues, you should try to tie them into new, long-term contracts as soon as you can so that prospective buyers can see that they would have a guaranteed future revenue stream if they decided to purchase your business.
5.Create a five-year strategic plan: Even though not all investors, especially strategic ones, will consider your strategy plan, having one will benefit your business regardless of whether you are successful in finding a buyer. It gives you and potential buyers of the business a blueprint for how the business will create value over the following five years. Even investors seeking acquisitions for their own strategic goals will value a company with a distinct value-creation strategy. The ability to demonstrate these possibilities can help convince a buyer who is otherwise undecided about a purchase.
6.Organize your company: Over time, businesses frequently add fat. This might include non-core assets (see the section above on cleaning up the company’s balance sheet) or product and service lines that have now become obsolete and are only used by a few clients annually.
For instance, a business might sell a product that only contributes a small amount to annual sales and isn’t needed by its target market. By getting rid of it, the business can concentrate on its core products while streamlining its inventory.
7.Evaluate Your Brand’s Positioning And Reputation In The Market: Brand equity is the measure of how strong a brand is and how much people trust it. It can be measured by the brand’s reputation in the market and its position in the minds of customers. After an acquisition, a company’s marketing strategy should be aligned with that of its new parent company. The post-acquisition marketing strategy should also take into account the fact that it will now have to compete for attention with other brands in its new parent company’s portfolio.
8.Make sure a great team is in place: A potential buyer is less likely to make an offer if they believe they will need to replace your entire staff as soon as they take over. Bring together a qualified team that can be seen as an asset. The buyer will be able to see that their change management process will go much more smoothly if you have a better team in all the departments. Companies preparing for a sale all too frequently ignore human capital because they believe it to be nothing more than an operational expense, oblivious to the value provided by this area of the organization.
9.Compile a list of potential buyers: Before starting a sales process, the majority of business owners have a notion of the potential customers for their organization in the back of their minds. Typically, local competitors and investors are on this list. When creating a list, consider why your business would appeal to those customers and how you may increase its appeal based on those characteristics. You should then use this information to expand the list.
10.Make effective business communications: To start the sales process, your business will require a sales memorandum and a non-confidential teaser. These should use precise, current, and intelligent information to persuasively convey to purchasers the advantages of the transaction. Most importantly, investors should understand what they are buying. Think of an elevator pitch; you should be able to explain your company in ten seconds or less.
Conclusion
Business owners should start preparing for business acquisitions early. This is because the process of acquiring a business is long and complicated and can take months, or even years to complete. Acquirers will want to conduct extensive due diligence on the company, which includes reviewing financial data, legal agreements, and other documents. They also want to talk to key stakeholders such as management team members, customers, suppliers, and competitors.