One way of growing your business is to buy another business. There are various good reasons for doing so, most obviously the economies of scale that the combined business can expect to achieve. There's also the opportunity to increase market share, to grow the geographical reach of the company, and there are potential tax advantages. For example, a profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. There are friendly or hostile acquisitions, or takeovers, but this guide focuses on the friendly method. Also, acquisition usually refers to a purchase of a smaller firm by a larger one but not always. If a small firm buys a larger one, it's known as a reverse takeover. Here is an outline of the acquisitions process.
The first thing to do is review any available relevant financial and commercial information to establish the feasibility of the proposed acquisition of Co XYZ Limited, including a review of potential funding structures.
You then need to develop a detailed business plan that will include integrated profit and loss, balance sheet and cash flow projections for submission to potential financiers.
Work out funding capacity of the combined business based on current levels of gearing and available security together with the working capital and other financing requirements of the proposed acquisition and, in the light of these, determine a suitable funding structure for the proposed acquisition. Then develop an appropriate deal structure for the proposed acquisition, taking into account the growth requirements of the combined business, and determine a range of offer prices.
You will then need to meet with sources of debt finance, as appropriate to the funding requirement, and present strategy to potential financiers. Then review and compare the related conditions of investment offered to you by potential financiers, considering alternative proposals/scenarios, and select preferred debt providers.
Once you've done the above it's time to complete final negotiations with the vendors and their advisers and complete the legal documentation relating to the acquisition. Financial advisors, such as Grant Thornton, are active in this for small firms and they would project manage the acquisition (including the due diligence requirements of funders) to completion liaising with the target, the vendors, their lawyers and financial advisors, your lawyers and your chosen funders.
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