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Different Types of Business Acquisition


17 October 2023

Growing your company organically can often be a long, time-consuming process. If you are keen to expand your business in the shorter term, there are options that will provide the funding, support and opportunity to do so. Business acquisition allows you to accelerate growth, expand market share and achieve economies of scale.

However, it is important that acquisitions are managed efficiently. In the last quarter of 2022, the Office for National Statistics reported that the value of UK companies acquiring other UK companies was recorded at £3.6 billion. Compared to the previous quarter, this was an increase of £1.7 billion. Although we are seeing an increase in mergers and acquisitions, it is imperative to have a clear strategy on how to manage them effectively.

There are many different types of business acquisition to choose from, but how would you know which one is right for your organisation?

In this article, we will explore:

What is business acquisition?

A business acquisition works by a company buying out the assets or shares of another company, establishing itself as the new owner. The business that has just been acquired then becomes a subsidiary.

Companies acquire other companies in order to:

  • Improve access to another market
  • Add more value to the subsidised company by improving its performance and profitability
  • Eliminate market competition
  • Retain the subsidised business’ assets, staff, and equipment
  • Develop the other company more effectively

What’s the difference between a merger and an acquisition?

The terms ‘acquisition’ and ‘merger’ are often used interchangeably, yet they do hold different meanings.

An acquisition is the act of your company taking over another company, making you the new owner. It is common for bigger companies to ‘take over’ or ‘buy out’ a smaller company.

A merger combines two or more companies to form a new entity, or to integrate their operations and ownership. The impact of this can create a large-scale organisation that profits off increased market power. An excellent example of this was Meta's decision to merge Facebook with Instagram and WhatsApp. This allowed Mark Zuckerberg to create greater synergy, and the performance of all three successful platforms has broadened the business.

Different types of acquisitions

The types of business acquisitions are extensive; each holding different conditions:

Asset acquisitions

Asset acquisition is when the buyer holds assets belonging to the subsidised business. For example, the purchase of trademarks, property and plant machinery. The advantage of an asset acquisition is that it gives the buyer flexibility to choose which assets they would like to obtain. From the seller’s perspective, they are still able to remain in legal control of their business.

However, an asset acquisition can cause several disadvantages, such as:

  • Asset inventory
  • Associating responsibility for asset repairs
  • Agreement on if the buyer would need the seller’s work on the asset. For example, any labour required in operating the asset
  • Identifying any licences or permits required for the buyer

Share acquisitions

A share acquisition is also known as a stock or equity purchase. The buyer secures all of the seller’s shares. Along with this, the seller’s assets and liabilities belong to the buyer. The benefits of a share purchase are that they allow the buyer to become the owner of the entirety of the business, in one swift transaction. On the other hand, the share buyer would be responsible for any legal or tax implications of the business. From the perspective of the seller, they lose their rights to own the company.

Conglomerate acquisitions

With a conglomerate acquisition, one business can buy another that operates in a different sector, meaning they are not in any competition with one another. The impact of making a conglomerate acquisition means that both the buyer and seller can benefit from shared assets, ranging from access to each other’s market, and diversification.

The largest conglomerate mergers in history

  1. Berkshire Hathaway and Precision Castparts merger for $37B in 2015
  2. United Technologies and Rockwell Collins for $30B in 2017
  3. Berkshire Hathaway and Burlington Northern Santa Fe for $27B in 2009
  4. Berkshire Hathaway and Heinz for $23.3 in 2013
  5. Mars Inc. and Wrigleys for $23B in 2008
  6. United Technologies and Goodrich Corporation for $18.4B in 2011
  7. Siemens AB and Varian Medical Systems for $16.4B in 2020
  8. Berkshire Hathaway and Gen Re for $16.2B in 1998
  9. Danone and Numico for $13B in 2007
  10. 3M and Acelity for $6.7B in 2009

Leveraged buyouts

A company can borrow finance to fund the cost of a business acquisition. An organisation may prefer to choose this option when acquiring another business because it reduces the risk of losing any assets. The advantages let you buy large-scale companies, as well as increase your rate of return. Once the leveraged buyout is secured, you are able to repay your loans through the cash flow of the subsidised business. The downside of a leveraged buyout is that it brings a high level of debt, making it more challenging to handle interest rates, cash flow and changes in the market.

Management buy-outs

A management team of a business can buy the company from the existing owners, and, similarly to a leveraged buyout, is funded by money that is borrowed. You may choose a management buyout acquisition to improve the organisation from your perspective, growing it in a way that is different to the strategy of its current shareholders. It is important to consider that it can be complex to change from employee to owner, and additionally can be difficult to raise the necessary finance to make the buyout happen.

Horizontal acquisition

With a horizontal acquisition, one business acquires another business within the same industry. For example, in 2013, American Airlines and US Airways merged to form American Airlines Group Inc. The combination of both airlines resulted in an expanded route network and market reach in a cost-efficient way.

Vertical acquisition

Opposite to a horizontal acquisition, vertical is when a company acquires another company that operates at a different stage of the chain or production process. The goal of a vertical acquisition is to gain greater control over the company’s supply chain and improve efficiency.

Additional benefits include:

  • Cost and quality control - targets and specific standards are met
  • Reduced risk of supply disruptions
  • Increased collaboration with customers
  • Stronger market position

However, it is important to understand that an integration like this cannot be made swiftly. It is a long-term process that also requires staff to be trained in other areas of the company’s production line. You may also need to pay large upfront capital requirements.

Factors to consider in an acquisition

Before you make the decision to acquire a business, take the time to review the following details before getting started.

Due Diligence Checklist

Due diligence enables you to measure the financial health, operations and challenges against the business you are about to acquire. In order to gain a greater understanding of the company and ensure it is a wise investment, consider the following:

  • Finances:
    • Annual reports
    • Cash flow
    • Collateral
    • Equity
    • Expenses
    • Debt
    • VAT statements
    • Tax liabilities
  • Legal:
    • Insurance policies and claims
    • Licensing/policy agreements
    • Health and Safety
  • Operational structure:
    • Manufacturing and distribution
    • Shareholder and third-party contracts
    • Invoices
    • IT Software
  • Business assets:
    • Assets
    • Intellectual property
  • Employee:
    • Staff contracts
    • Board members
    • Job roles and salaries
    • Pension plans
    • Company culture
  • Marketing:
    • Budgets
    • Key Performance Indicators
    • Brand recognition

Business Strategy

Identify how your business acquisition will fit with the company’s goals. A clear strategy can help your overall vision of where you would like to take the business.

Understand the acquisition

Whether you are acquiring an asset or share, it is important to understand the consequences. Even though you have acquired another business, what liabilities are you taking accountability for?

Use a third-party mediator

Having a third-party to negotiate the acquisition can be a swift, professional process for both the buyer and seller.

Human Capital

Your employees are your greatest asset - maintain communication with your staff about the acquisition before it is distributed to the public.

Know your competitors

If you are acquiring a business in a different market from your primary one, you might need to recognise the existing competition and how you will challenge the competitors. Get to know what the acquired business is up against.

In need of a business acquisition loan?

We know that business acquisitions can be a long-term process, and that’s why our team of trusted experts is on-hand to make it as straightforward as possible for you.

Tell us your business goals, complete our business acquisition loan application form, and receive your funds - it is as simple as that!

To find out which acquisition works best for your organisation, contact us today.

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