An acquired taste

Many smaller businesses don’t really consider the potential benefits of growing through acquisition. And there are many. Yes, there can be problems, too, but the negatives can usually be sorted out with a bit of planning. We’re not necessarily talking about acquiring a competitor, either. You might want to consider buying a supplier (giving you favourable and cheaper access to whatever it might be that your business buys in). Or maybe you could consider purchasing a customer, securing a distribution channel for your goods or services. For now, though, let’s assume that the target of your affection is a business similar to your own – selling the same stuff that you do. What might the major benefits of buying that business be? Here’s a list of the main ones, as I see them.

  • Growth in turnover is pretty much immediate whereas achieving that same growth in sales organically could take ages and be very painful. Where achieving high turnover quickly is vital (for example, to achieve a fairly dominant market position before anyone else) this is a really important point.
  • You can take the best bits of the business you’re buying and combine them with the best bits of your existing business. At the same time, lose the weaknesses of both. The combined entity or ‘the whole’ is then so much stronger than ‘the sum of the parts’ (in other words, you’ve unlocked synergy).
  • Similar to the point immediately above, it might be the case that the business you’re buying has particular strengths and that you can only get your hands on these by owning them. It might be key staff or intellectual property (brand names or patents, for example) or maybe they have access to customers and distribution channels that would be impossible for you to attack any other way.
  • The immediate increase in size puts you in a more powerful position with suppliers. Instead of both you and the business you’ve bought negotiating independently on prices, suddenly you’re going to the table with bigger order volumes and the prospect of volume discounts up for grabs.
  • The business you’re buying might enable you to widen your geographical spread in a way that would be difficult and expensive to do organically.
  • Believe it or not, it might actually be cheaper to buy up a competitor rather than go through the pain barrier (and arguably much higher risk) of investing (and probably borrowing to do so) large amounts of cash, time and other resources in an attempt to penetrate the market yourself. And that attempt isn’t guaranteed to be successful.
  • By buying up a competitor, you’re ‘taking them out’ of the market. Okay, you might want to use their brand but – it’s actually your brand now!
  • Finally, and this point has sort of been covered by some of the above, significant barriers to entry to a new geographical or product market might exist which would be hard to overcome on your own. The patent issue is an example of a product barrier and, in terms of a geographical barrier, the excellent local reputation of the target company’s brand may be a case in point.

So, you’re going to acquire. How do you do it? Do you buy the target company’s share capital (i.e. purchase the shares in the company) or do you make an offer to buy the company’s assets? Referred to as a share purchase and an asset purchase, the tax and accounting treatments are very different. I’ll explore these in my next article.

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