In brief – Acquisition can accelerate the growth of
One way to accelerate the growth of your business dramatically
is to buy another business. This can help you gain a competitive
advantage in your industry, expand the scale of your operations and
lead to a number of potential benefits. These include the growth of
your client base, expansion into new markets, reduced competition
and decreased expenses through economies of scale.
What makes a good acquisition?
To buy a business successfully, your existing business needs to
have a solid foundation. This means having the people, systems and
resources to be able to integrate your operations effectively and
smoothly with another company. Be methodical - create an
integration strategy with realistic expectations and deadlines.
Funding the acquisition
How you fund buying another company is an important decision to
be made at the outset. There are four main methods:
Debt funding – borrowing money from a
bank to fund the acquisition
Equity funding – existing or new
shareholders of your business contribute money to fund the
Cash-flow funding – this is possible
ifyour business has cash reserves and is considerably larger than
the business to be acquired
Merger – in effect, this means buying
a business by selling part of your existing business to the seller
of the acquired business
The acquisition process can be broken down into six steps.
Step 1. Identify the target
If you are looking to buy a business in your own industry,
doubtless you already know who your competitors are and which of
them are attractive acquisition targets. Alternatively, you may
consider buying a business which is a supplier to your industry,
allowing you to cut costs and/or increase profit margins. Another
possibility is to look at distressed businesses selling assets
– IP, equipment, plant – which create synergies
with your existing business.
Step 2. Enter into a terms sheet/heads of agreement
This is a summary of the main commercial terms agreed between
the buyer and the seller and should include a timetable for
completion. The terms sheet usually remains subject to contract and
is non-binding (except for any confidentiality provisions).
Step 3. Enter into a confidentiality agreement
If you are the seller of a business, it is prudent to ensure
that any prospective buyer signs a confidentiality agreement before
you disclose any confidential or commercially sensitive information
about your business.
Step 4. Conduct due diligence
It is vital to research the target thoroughly to analyse its
commercial, financial and legal position.
Step 5. Determine the value of the target
Don't rely solely on EBIT and revenue streams in performing
a valuation and don't rely on your own skills to do the
valuation unless you are an accountant. Consider these
Profit projections with reference to key business
Industry comparisons and competitive advantages
Non-financial factors such as the management team and public
Step 6. Negotiate the sale agreement
You need to determine whether you are acquiring the assets or
the shares of the target. If you use a share sale agreement, you
are acquiring all the assets and liabilities of the target company.
If you use an asset sale agreement, you are not obliged to acquire
all the assets or any of the liabilities.
Keep a cool head
The biggest disasters in business acquisition stem from failure
to do due diligence properly. Sometimes people can be so swept up
in the romance of the deal, so keen to clinch it, that it clouds
their reason. Just because you can read the contract yourself
doesn't necessarily mean that you truly understand its nuances
We've seen people who have ended up saddled with the
vendor's tax liabilities and customer/supplier liabilities
because they didn't understand what they were committing to and
failed to get professional advice. Your lawyer, accountant and
business advisor are the people who can save you from making a
decision with dire consequences.
Swaab Attorneys was the highest ranking law firm and the
13th best place to work in Australia in the 2010 Business Review
Weekly Best Places to Work Awards. The firm was a finalist in the
2010 BRW Client Choice Awards for client service and was named the
winner in the 2009 Australasian Legal Business Employer of Choice
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).