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Things to Consider Before Acquiring a Business

November 13, 2014

Things to Consider When Acquiring a Business
Image courtesy of Stuart Miles at FreeDigitalPhotos.net

There are several reasons why a business might consider purchasing another one. Your company could be interested in buying out a competitor or in purchasing a company that performs a service that complements the services offered by your business. Your business might be thinking of branching off into another industry, and acquiring a company with a proven track record provides a reliable way to do so.

The keys to a successful acquisition lie in doing a fair amount of research into the company first. You should know what you’re getting in the acquisition. Whether this is your first acquisition or not, the team at New Direction Capital has years of experience in acquisitions and can help you through the process.

The Story of the Other Company

When acquiring a company, whether it’s a competitor, a supplier, or a company offering a related service, it’s helpful to know the full story of the company, which means looking at the hard data and facts about the company as well as at the way people in the community perceive it. Joining your business with another business that has a negative reputation in its community can be problematic, for example.

Along with examining the company’s reputation, you also want to look at the type of business it does. Does the company have an established, loyal base of customers?  Is the industry it is in on the rise or is it a declining industry? Are there a lot of other companies in the area offering the same or a very similar product or service?

Its Financial Outlook

Part of researching a potential acquisition is learning more about the financial outlook and status of the company. The current owner of the business should provide you with tax documents, accounts receivable and payable, and profit and loss statements for the company. You also want to review the debts of the company and to take a close look at the structure of those debts. If a lender has placed a lien on the business or has the ability to seize the company’s assets if the business owner falls behind on the debt, that can be a red flag.

It’s also important to take a close look at the tax records of the potential acquisition. If the current owner has fallen behind on either payroll taxes or state sales tax, you might end up being responsible for those taxes when your company acquires the business. It’s a good idea to get confirmation from the tax authority that the current owner has paid up on taxes before moving forward.

Clash of Cultures?

Businesses differ not only in what they create or offer, but also in how they go about practicing their business. If you plan on merging your current company with the business you acquire, it can be worth taking a look at the cultures that exist at that company, compared to your current business. If your business is very formal, but the new company is very laid back, how will you bridge the gap between the two businesses? There’s also the issue of having your current employees clash with the staff of the company you’re acquiring. While your business cultures don’t have to be identical, looking for similarities or coming up with a way to work around major differences is an important part of a successful acquisition.

What Will You Get?

When you acquire a company, it’s essential that you understand what you’re actually acquiring. You might be purchasing the assets of the company, which would give you the debts and inventory of the company, but not the actual shares of the business or the entity itself. In that case, your current business could absorb the assets or you could create another business entity. If the deal is structured so that you’re purchasing the business entity and its stock, you’re buying the assets of the business and the actual business itself.

The way the deal is structured, whether it’s an asset purchase or entity purchase, determines the amount you pay in taxes. A virtual CFO can help you understand the different types of deal structure and the one that provides the most benefit to your company.

To learn more about the process of acquiring a business and the steps you can take to make an acquisition successful, contact New Direction Capital today.

Previous Post: « Do You Know What Investors Want?
Next Post: Financing 101 (Part 2): Taking a Closer Look at Equity Financing »

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