A business takeover occurs when one business purchases another business. In most cases, a larger business will buy up a smaller one. There are several reasons why a company would choose to buy up another company, including:
- The business being purchased has a high and regular profitability. This means the company being bought knows how to make money and steadily continues to do so
- The business to be acquired is considered a high-quality business. This means the business has assets such as convenient distribution capabilities, manufacturing capabilities, etc.
- The business is buying up the competition. By purchasing this business, the result may be that the purchasing company will corner the market in their particular sector of the market. However, it is important to remember that antitrust laws prohibit monopolies, and there can be federal legal action if antitrust laws are broken.
- The purchasing company is hoping to boost revenue. A large company losing money may buy a smaller, more profitable company to boost its revenue. Sometimes, this is done without giving sufficient regard to its own profits, which generally decline during the business acquisition period because it is expensive to buy another company.
What are the Advantages of Purchasing a Business?
There are several benefits to purchasing an existing business vs. starting a new company. Buying an existing company saves the purchaser the time and energy required to create a new company. For example, the company to be purchased is already established at a physical location, has employees, and presumably has an established customer base. Moreover, purchasing an established company may be appealing because it can be less costly than starting a new business.
Other benefits include:
- Knowledgeable management who are successful at running the business
- A complete staff
- A purchased business is often easier to handle and manage from the start
- The company has existing inventory or machinery
- The company has verified customers
- The company has a network of professional contacts\
- The company has an established financial history.
Because the business to be purchased has these assets, it can make securing any needed funding easier, including business loans or investments. In addition, since the business is already established, the funding required would be a lower amount than if the business was just launched.
The business may already have several established locations, including overseas. This is helpful, especially if the purchasing business wants to expand its own business – it will have a foot in the marketplace already.
Are There Different Types of Business Takeovers?
Yes. There are three types of business takeovers. They are:
- A friendly takeover
- A hostile takeover
- A reverse takeover
A friendly takeover occurs when one business offers to buy another business. Then, the business that was desired to be acquired willingly accepts the offer. The shareholders of the purchased company may receive cash for the buyout; however, it is more common for them to receive several shares in the purchasing company.
A hostile takeover occurs when one company moves to acquire another company, even if that company does not want to be bought out. The methodology for the takeover is to buy a sufficient amount of stock in the company for the purchaser to have a controlling interest (meaning they own a majority share). Because this is done via the stock market, a hostile takeover can only be done with businesses traded on the public stock market.
Reverse takeovers are simply takeovers that have an unusual form. A reverse takeover can be accomplished in several ways:
- A smaller company purchases a larger company
- A private company purchases a public company and takes it private
- A private company establishes a shell company, which buys out the private company. This would bypass securities
- regulations and requirements that apply to transforming a private company into a public company.
Why Would I Want to Merge My Business with Another Business?
Note: what is called a “merger” is often actually an acquisition. One business purchases another business; those two are combined to form a new company.
If a small business is attempting to grow, it has the option of making an initial public offering of its stock on the stock market (an IPO). That is an expensive process. Merging with another company may be more lucrative, especially if the market is erratic. A small business may want to put itself up for private sale because being acquired could be an economically safer long-term growth strategy.
If a business is trying to enter a new market, acquiring another business that is already in that market may be a cheaper alternative than trying to start up a new business in a location that the purchasing company is not familiar with.
Many larger businesses will strengthen their business by diversifying their product line. Acquiring or merging with other businesses is often the best way to diversify.
What are the Possible Results of a Hostile Takeover?
In many cases of hostile takeover, a company wants to purchase a controlling interest in another company because that company, known as the target company, is highly profitable. In these cases, the target company will continue doing the same business it was doing before the acquisition. It will simply be under new ownership. The acquiring company will be able to reap the rewards of the target company’s business successes.
Another method of accomplishing a hostile takeover is a corporate raid. This means the acquiring company buys a company with a low stock price because it is not doing well financially. However, the target company has valuable tangible assets, such as land or equipment, that the purchasing company can sell or that the purchasing company wants or needs for its own business.
After a successful hostile takeover, the acquiring company will liquidate what is left of the target company by selling the target company’s remaining assets, effectively destroying the target company.
How Can I Avoid a Hostile Takeover of My Business?
There are steps a business owner can take to ensure that it will retain its business and will survive a hostile takeover attempt.
One method is to develop a monitoring system. One key to surviving a hostile takeover attempt is to see it coming and be aware of impending threats. This requires looking for other businesses that have shown an interest in acquiring their business. It also includes watching if a business in its sector has been buying up other companies in the same or similar line of work. It also includes monitoring purchases of its own stock to determine if one buyer is purchasing unusually large quantities of the company’s shares.
It is also important to create a strategy for fending off attempted hostile takeovers. It is critically important to put this strategy into action at the first sign of a takeover attempt. This strategy should include the following areas of the company:
- Legal activities
- Investment banking
- Public relations
If Another Company Wants to Buy Up My Small Business, Should I Consult a Business Attorney?
Yes, you should consult a business attorney for any issues regarding the purchase of your business. Whether or not you desire to sell your business, if another company has asked you to sell it to them, it is essential to have an attorney’s help either to complete the sale or to fend off a hostile acquisition.
