A Guide to Business Acquisition

Whether it’s part of your growth strategy or an opportunity that’s arisen, acquiring another business can open up a huge range of new possibilities. Here we’ll take a look at the advantages, key considerations and how to finance a business acquisition, to help you make the best decisions for your business. 

What is business acquisition?

In simple terms, business acquisition involves growing an organisation by purchasing or taking control of another business. Business acquisitions of this kind are also called mergers and acquisitions, and the topic as a whole covers the buying, selling and consolidation of companies and the various methods you can use to finance this happening. 

The benefits of acquiring businesses

There are a number of reasons why your business might choose to embark on a business acquisition, and therefore need to seek business acquisition financing. These reasons include the following:

• Absorb the financial clout of another business to fuel growth

• To take advantage of the products, people, technology, customer base, processes, operations and intellectual property (IP) of the business being acquired

• To take control of a competitor working in the same sector as your business

In some cases, a business acquisition may be prompted by a business that is suffering from poor cash flow or struggling with a difficult market backdrop, and is therefore willing to sell or be taken over for a lower price than would usually be the case. 

The clear advantages of business acquisition include the following:

• Merging with another business to become larger will enable your business to take advantage of economies of scale, cutting costs and boosting profits

• Acquiring a business in another territory will enable your business to reach international markets at speed 

• The talent employed by the new business will become part of your business, boosting the expertise you can call upon without the long and expensive recruitment process this would usually involve

There are risks involved in business acquisition, however, which include the following:

• Taking on another business brings a wide range of costs with it. These can include any debts the business is carrying and the on-going operational costs of running the business

• Merging with another business might mean some of the functions and processes of your business are being duplicated, which is the opposite of the kind of increased efficiency business acquisition is intended to deliver

• If the ground is not prepared properly, with time taken to ensure that the ethos and vision of the two businesses align, it can lead to disruption, with employees from the business being acquired perhaps opting to move elsewhere

What are the options for financing a business acquisition?

There are a range of options available when it comes to financing a business acquisition, including the following: 

Cash reserves

If your business has sufficient spare cash on the books to fund a purchase then using cash can be the simplest and quickest option. It should be noted however that a large sum of money may be needed, depending on the size of the target business, and that once the money has been spent it is no longer held by your business as a safety net or investment fund.

Earnout or deferred consideration 

An earnout refers to a percentage of the money paid for a business being dependent upon the performance of that business over a set period following the merger, such as 5 years. A deferred payment, on the other hand, simply delays making the full payment for a specific period. In both cases the owners of the purchased business will need to be persuaded not to demand payment up front.  

Shares

In some cases you might offer equity in your company – in the form of shares – instead of cash. It is even possible to structure a deal so that each party ends up owning 50% of the business formed by the merger, without money having to change hands. Alternatively, the seller might be persuaded to take shares in the newly formed company as ‘payment’ or part payment, and will therefore still be invested in the success of the company. 

Business acquisition loan

If external funding is needed to push a sale through – as is often the case – then a business acquisition loan can provide the required funding. This allows you to protect existing capital and avoid giving up equity. It can also help fund any changes you need to make to merge the newly acquired business into your operations. 

How Funding Circle can help

You can apply for a Funding Circle business loan to fund a business acquisition. You could borrow from £10,000 to £500,000 over up to 6 years. All loans are fixed rate and come with no early settlement fees. 

30/10/23; While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.