Buying and selling business

Both private and public companies regularly change hands—they are bought, sold, and restructured to reflect changing business conditions. These deals all come under the umbrella term of mergers and acquisitions (M and A). Acquisition financing is usually needed to pay for the purchase of another company, often in the form of a loan or venture capital.

How to acquire a company

A company is typically acquired in one of two ways—either by a management team or by another company. When a company is buying, the result can be a merger, in which two companies join forces, an acquisition (outright purchase), or a divestiture, in which part of a company is hived off and sold. Management team purchases are often funded by private equity.

Management team acquiring

Private equity firms look for companies to buy and then sell their shares when profits have maximized. They fund the management team

Buy-out

The existing management team buys out the company they work for.

Buy-in

An external management team buys into the company.

Divestiture Part of company
is split off to form new company; may become acquisition target

Another company acquiring

Companies may want to expand by joining with another business.

Merger The company combines with another company.

Acquisition

Horizontal The company buys another company that makes similar products.

Vertical The company buys another company that makes different products.

SIZING UP M AND A’S

Measuring a big deal

The corporate world categorizes acquisition deals according to the capitalization size (the value of the company’s shares).

Due diligence

Before any company sale, the potential buyers see a detailed report prepared by lawyers, covering key aspects of the target business.

❯ Financial Identifies problem areas that could affect the future value of the company.

❯ Legal Gauges possible legal risks attached to corporate status, assets, securities, intellectual property, and employee reshuffling.

❯ Commercial Includes industry trends, market environment, the company’s capabilities, and the competition.

❯ Environmental Uncovers
potential liabilities such as land or water contamination and estimates remediation costs.