Business acquisition is one of the most significant activities that take place in any organization. Incorporate financial management, acquisitions and mergers are important transactions where specific business enterprises, other organizational entities, or operational units are acquired or merged. It is a critical strategy in achieving strategic positioning and competing with other businesses in the same market. This facilitates long-term cost savings and better utilization of assets by the acquisition recipient. It also enables the successful integration of the acquisition into the existing business framework.
Acquisitions may be made from any business in the same industry or geographical region. But the primary requirement for purchase is cash. Most of the time’s acquisition funding is raised through business acquisition loans (usually IPOs). Private funding and bank loans are also sources of acquisition funding. Click Here to learn more about the business acquisition.
When a business decides to make an acquisition, it requires detailed negotiation with several financing options. Typically, if the target firm is already a publicly-traded company, then there are several options available for raising capital. Some of the common business acquisition financing options available include the following: earnout, mortgage banking, placement of indebtedness, partnership financing, and purchase loan. Depending upon the type of financing option chosen by the buyer, the amount of the investment will vary. Here are the basic options for business acquisition funding.
Earnout. This is the most common and simple method of business acquisitions. In this method, one company buys the entire acquired firm, including its operating shares. The price usually depends on the equity value of the total acquired enterprise and the weighted income of the entire acquired firm.
Mergers and acquisitions. In mergers and acquisitions, two or more firms can buy or acquire each other. In this case, one company becomes the core business unit of the acquiring firm while the other acquires a business through an offer of a buyout. In this type of transaction, the buying firm normally purchases all the shares of the owning partner’s firm and the acquiring firm acquires all the shares of the core firm. In some cases, the purchasing firm retains a minority interest in the acquiring company. The price range of the deal will depend on the equity value of the combined firm and the total market share of both companies.
Lease purchase and leasebacks. Lease purchase and lease backs are business acquisitions that entail a property that can be used as collateral. In this type of acquisition, a third-party organizes to purchase the total assets of the target firm in return for a certain sum of money. The price will be based on the current value of the assets and the relative value of the various payments involved in the transaction.
Business acquisition financing involves the hiring of a qualified independent accountant to conduct the analysis of the acquisition proposal and the financial statements that will support it. In general, when a business firm is considering making an acquisition, it would first need to develop and present a business plan to the prospective financier. The accountants can provide valuable advice to help potential investors to obtain the required funds.
Business acquisition is the purchase of existing company shares from another company in an attempt to realize the investment value of the invested assets. Acquisitions are considered to be a very strategic business activity. By making acquisitions, organizations not only aim at reducing costs but also at reducing their total debt. The key advantage of acquiring an existing business is that it requires lesser risks compared to new start-ups since the acquired firm already has a track record of profitability. However, with the increasing competition in the foreign market, it is important to identify the most suitable acquisition options.