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If you are a business thinking about purchasing another business, then there are a few things you should think about. You must consider what it will mean both financially and professionally for both enterprises. There are many great reasons to consider bringing in another business, as well as many ways to do so. Read on for a brief overview of the process of one business buying another as well as when and why it happens.
The Process
Buying a business is similar to buying a product or service but on a grander more complicated scale. This transaction is called a merger or an acquisition, depending on how it is done and the result. Buying another business is purchasing a new future. There are several different factors and generally many people and livelihoods depend on these transactions. Using professional business brokers to serve as intermediaries is a good way to make sure that you cover and include all the necessities when conducting these affairs. Mergers and acquisitions can be awesome adventures and result in more profitable organizations and increased happiness, but they must be done well.
Mergers vs. Acquisitions: What Is the Difference?
The terms merger and acquisition often get used interchangeably but they are technically two different concepts. A merger is when two separate entities combine to create a brand-new legal entity. Truly equal mergers, through which both companies are equally represented in the new company, are rare occurrences. Mergers tend to end up with one company having a bit more advantage than the other in the new organization. On the other hand, an acquisition is a transaction in which one entity gets completely absorbed into the other. No third entity is created during an acquisition. In an acquisition, the acquiring entity remains, and the absorbed entity largely ceases to exist.
Types of Mergers and Acquisitions
Generally, there are four different types of mergers or acquisitions:
- Concentric- companies that produce related products or services come together to offer extended products or services
- Conglomerate- companies from unrelated industries come together to offer extended products or services
- Horizontal- companies that produce the same product get together to reduce competition
- Vertical- companies that work in different supply chain phases of the same industry combine to make production more streamlined
These different types of mergers are generally amicable transactions, as both entities agree that the agreement is in everyone’s best interest. Acquisitions, on the other hand, can be friendly or hostile. Unfriendly acquisitions are often called hostile takeovers. In a hostile takeover, the company being purchased does not want the purchase to occur. The purchasing company takes over by actively buying up enough company shares to become the controlling party. Once one company acquires the controlling interest, then the other company has no choice, it is officially bought out. The purchased company then usually ceases to exist, or if it does remain, it continues in a definitively unequal fashion.
Why Consider a Merger or Acquisition?
Though at times mergers and acquisitions are not mutually beneficial, there are many sound reasons to consider forming these business arrangements. Mergers and acquisitions can lead to profit increases, product and service expansions, cost reductions, new market entrances, technological improvements, competition reductions, development and growth opportunities, and simply general survival. Whatever the reasons, choosing to merge or acquire businesses is a major decision and undertaking, but it can be a very rewarding one.
Mergers and acquisitions regularly transpire in the world of business. They can be on equal or unequal footing and result in the formation of a new company or the disappearance of another. Successful mergers and acquisitions typically mean that at least one of the businesses involved comes out better than before. Ideally, both parties will be satisfied at the end. Whatever the case, mergers and acquisitions continually grow and shape the world of business.
You may also like: Steps to Buying a New Business
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