Date: 06/02/2024 | Corporate
As lawyers we are often asked by clients about the mechanics of buying a business and how that works in practice but often the really important question is not “how?” it’s “why?”
The headlines are full of big corporates buying smaller businesses, but in reality independent businesses tend to be much less keen on stepping into the world of mergers and acquisitions. Why is that and is their hesitation justified?
In essence, buying a business is an investment – time and money are spent to gain control of another business and the aim is usually to generate financial returns.
In thinking about whether buying a business is for you, there are lots of strategic issues to think about:
- What resources do you have and is this best the way to use them? Is pursuing an acquisition going to cost you other business opportunities?
- What is the strategic reason for an acquisition – taking out a competitor, extending market reach or acquiring key assets?
- What would you do with that business if you owned it?
- What sort of financial return are you looking for?
Buying a business is inherently risky and although as lawyers we can draft documents to minimise risk at the point of purchase, that will not help if the acquisition strategy behind the deal is wrong. Many deals fail to produce the anticipated financial benefits because not enough diligence is done at the outset or because only limited thought and planning has gone into how the integration of two businesses will be managed and the time that will take. This risk makes some organisations reluctant to even consider acquisitions.
So given the risks, why take the chance? There are lots of reasons:
- Organic growth can be slow. Finding new staff, new customers and new products takes time. Buying a business can allow instant access to new markets, new products and new assets.
- De-risking your expansion. Undertaking new projects can be risky, developing a new product or expanding into a new market can be costly and may not be successful. Buying a business that has already achieved those targets removes that risk.
- Increasing buying power. Economies of scale might be possible if your organisation was larger – greater buying power can help keep costs down.
- Different customer base. As a larger business you may have access to different customers or contracts and be able to set prices accordingly.
- Securing core business. Buying a complementary business or a supplier can help to stabilise and secure your core business.
- Opportunity to sell up. Size does matter. If your exit strategy is to sell up, it may well be easier to sell a larger business than a smaller one as many corporate buyers are only interested in business of a certain scale.
There are lots of businesses for sale out there and exploring the possibilities is something well worth thinking about. If you properly understand what you are buying and why, and have a well prepared integration plan, the impact of doing a deal can be very positive.
If you would like to talk through the possibility of making a strategic acquisition please get in touch with any member of our Corporate team.
The matter in this publication is based on our current understanding of the law. The information provides only an overview of the law in force at the date hereof and has been produced for general information purposes only. Professional advice should always be sought before taking any action in reliance of the information. Accordingly, Davidson Chalmers Stewart LLP does not take any responsibility for losses incurred by any person through acting or failing to act on the basis of anything contained in this publication.