The Ultimate Guide to Business Growth Through Acquisition

“This is an important milestone for Facebook because it's the first time we've ever acquired a product and company with so many users. We don't plan on doing many more of these, if any at all.”

Mark Zuckerburg, Facebook CEO, Statement on acquiring Instagram.

Even for the most reluctant, the allure of deal-making is often too strong to resist. When Facebook (now Meta) acquired then-nascent photo-sharing app Instagram for $1 billion in 2012, CEO Mark Zuckerberg may have genuinely believed it was the last time he’d open the checkbook. But fast forward less than ten years later and his company has been involved in 50 additional mergers and acquisitions, including the $19 billion purchase of Whatsapp in 2014.

Facebook/Meta is not alone in its zeal for a deal. In the two decades since 2000, the Institute for Mergers, Acquisitions, and Alliances (IMAA) estimates that there have been just short of 800,000 M&A transactions globally, totaling approximately $57 trillion in value. Unfortunately, around half of these deals will be poorly implemented, with managers neglecting to put a proper M&A integration framework in place. 

At DealRoom, we help companies set their acquisitions up for long-term success. Below, we’ll go through the ins and outs of business acquisition, including pros and cons and examples. Let’s dive in.

What is a business acquisition?

An acquisition (also referred to as a buyout) is a business transaction in which one company (the acquiring company) gains control over another company (the target company) by purchasing all or the majority of the target company’s shares. Most people think of acquisitions as only occurring between large companies, but they’re actually more common between small and medium businesses. While acquisitions are usually agreed upon and supported by both parties, hostile takeovers do occur as well.

Why do companies pursue business acquisitions? 

When strategic growth is your goal, acquiring a business makes logical sense. For instance, the Harvard Business Review notes that successful companies not only rely on acquisitions for growth, but also find that this route often comes with less cost and risk than other growth methods. 

The business acquisition process must begin with a crystal-clear strategic goal and specific criteria for evaluating potential targets. Once you have both, you can begin the acquisition process in earnest.

What is the process for acquiring a company/business?

A business acquisition starts with a motive and ends with a closing. Overall, the process includes eight separate steps, which we’ll detail below. 

1. Establish a motive for the acquisition

Before considering a business acquisition, you need to have a good “why.” Broadly speaking, the motives for buying a business fall into the following categories:

• Diversification 
• Efficiency
• Leverage
• R&D/Patents
• Economies of scale
• Scope
• Transformation

Ask yourself which of these is the driver behind your motivation. Your answer might include a few of the above reasons; however, if there are too many on the list, your thinking around the acquisition has likely become muddled. This will only create problems down the line and potentially lead you to acquire the wrong business. Be honest about what you want and stick with it.

For a pinch of inspiration, see 11 powerful acquisition examples and what we learned from them.

2. Determine search criteria

Your target company search criteria are a natural extension of your motive and will determine your acquisition strategy. They might include:

• What markets should the target operate in? 
• What kind of customer base should it have?
• What kind of synergies are you looking for, if any?

The more questions you ask about the company before you begin searching, the more efficient the search will be. The more specific you can be, the better.

One word of warning: It’s critical to establish your financial criteria (how much you can spend) before beginning your search. There will invariably be a business just outside your price range that is more attractive than those within it. Maybe it has a bigger market share, a better product line, or a more engaging management team. The advice here is straightforward. If you can’t afford the business, don’t acquire it.

3. Conduct in-depth research

Much like Zillow or Trulia in real estate, in the realm of M&A there are dozens of online databases where business owners and their bankers list firms for sale.

Which of these databases you should choose will depend on the size and geography of your business. However, it’s generally useful to sign up for a few to cast a wider net. Aside from helping you find the right potential target business(es), spending time in these M&A databases also enables you to compare what’s on the market and the range of purchase prices being sought for companies in your space.

4. Begin the outreach process

If you opt to contact a business you’ve found through an M&A database, you’ll generally speak with their banker first. This individual acts as a gatekeeper and will assess your genuine interest in the company before sharing any confidential details. Standard procedure is to ask you to sign an NDA before providing you with a detailed memorandum of the business and its past financial performance.

Local small businesses, however, are unlikely to be for sale online. If you’re interested in discussing an offer with such a firm, there is no right or wrong strategy. You can ask your lawyer to check their willingness to consider a potential takeover, or you can approach the owner of the business yourself, being as transparent about your motives as possible without compromising the details of your acquisition strategy.

5. Schedule intro meetings

Introductory meetings give you a chance to meet the owner of the target business and hopefully, build a rapport.

If you do end up acquiring their business, there is every chance they will continue to play a key role in the integration of the two companies, so it’s in everyone’s interests to stay on good terms.

You may also use these meetings to assess the company’s culture — what’s brought them to where they are, how their employees are rewarded, etc.

6. Make an offer

If, having become well acquainted with the company, you still like what you see, it’s time to make an offer.

Your offer should balance your own purchase criteria, market comparables (what kind of multiples of EBITDA are being sought in the market for similar companies), and what the owner has intimated they’d accept. 

This last aspect is important. Nobody likes being “low balled.” It can be taken as an insult if your business valuation is way off that of the owner’s, and you could even risk alienating them from future deals. If you sense that you’re both too distant in valuation expectations, be honest about it at the outset to avoid wasting everyone’s time.

7. Conduct due diligence

Assuming the owner accepts your non-binding offer, you can move onto the due diligence phase. Depending on the size of the company, due diligence can take anywhere from three weeks to three months. However, about four to six weeks is typical for SMEs.

This is your last chance to find any skeletons in the closet of the business (if they exist), so don’t rush the process. Use it as an opportunity to become more intimately acquainted with how the firm operates so you can hit the ground running when the deal ultimately closes.

If you’re currently in the due diligence stage, we’ve put together a complete due diligence playbook that outlines each step of this process. Get a free trial now!

8. Close the deal 

Closing the deal will require some assistance from your lawyer to put together the required documents:

• Operative transaction agreements such as stock purchase agreement
• Legal opinions
• Regulatory approvals
• Evidence of third-party consents
• Considerations such as stock or cash
• Ancillary agreements
• Binding offer
• Terms of funds transfer
• And others

If you’ve reached this stage without any hiccups, the integration phase can begin in earnest. Download our post-merger integration checklist here to get started. 

How long does it take to acquire a company?

The steps and time involved in acquiring a company or merging two companies can vary greatly depending on the specific deal and its size.

A general time range is 6 months to a year, and sometimes longer. This includes planning and identifying targets, moving through diligence, and securing deal approval.

Even after the deal has closed, integration and change management practices can take quite a bit more time to implement. 

How long it takes to acquire a company can also be dependent upon the following:

• The buy-side’s desire to close the deal quickly
• The sell-side’s ability to generate competition
• The size of the companies
• The involvement of M&A advisors and financial bankers (they tend to speed up the process)
• The preparation of both the buy-side and the sell-side (are checklists created, is key information readily available?)
• The ease of the technology and project management platforms used to communicate and share key information

Types of business acquisitions

Business acquisitions come in several different “flavors.” The following are the types of acquisitions you’re most likely to come across: 

Horizontal acquisition 

A horizontal acquisition occurs when a company purchases another firm that operates at the same point in the supply chain. For example, a distributor might acquire another distributor, or a manufacturer might buy another manufacturer. In general, the aim of a horizontal acquisition is to expand the business into new markets, geographies, and customer bases.

Vertical acquisition

Vertical integration involves acquiring a company that operates at a different stage of the supply chain—a manufacturer acquiring a distributor, for example. Companies typically pursue vertical acquisitions to drive the consolidation of the production process under its own umbrella. 

Congeneric acquisition

A congeneric or concentric acquisition is when the acquiring company purchases a target company in the same industry, but offering a different product line. The aim is generally to diversify the new company’s offerings. 

Conglomerate acquisition

Conglomerate acquisition occurs when one company acquires another that operates in a completely different industry and product area. It is neither a horizontal nor a vertical acquisition. 

The pros and cons of business acquisition

Acquiring another company comes with both benefits and drawbacks. On the “pro” side, acquisitions are a quick way to expand your market share and enter entirely new markets. Depending on the type of company acquired, the resulting firm may even have the opportunity to change their business plan or model. In addition, acquisitions are a great way to gain new talent and generate synergies.

Unfortunately, an acquisition, no matter how much market research preceded it, comes with a certain level of risk and potential liabilities. They might even be conducted for the wrong reasons, like boosting short-term cash flows. M&A valuations are also an inexact science, so you may end up overpaying for the target company. Plus, acquisitions are time-consuming and resource-intensive. As a result, they can distract from your firm’s day-to-day business. 

Acquisition vs. takeover vs. merger

Takeovers are a subset of acquisitions in which the target firm does not wish to be acquired and is therefore “hostile.” “Acquisition” implies that both firms agreed to the transaction on friendly, positive terms. 

During an acquisition, the target company is completely subsumed by the purchaser and its independent operations cease. A merger, however, creates a new legal entity that’s more of a joint partnership than a takeover. 

Examples of business acquisitions

The past century has seen some of the largest business acquisitions in history. While the tech sector is responsible for many of them, other industries have also experienced significant acquisitions. Let’s go through a few examples. 

America Online and Time Warner Inc. 

In 2000, America Online (AOL) was the largest Internet provider in the United States. To expand its market share, AOL purchased giant Time Warner Inc. for $165 billion. However, management struggles and the dotcom bubble eventually led to the dissolution of AOL Time Warner in 2009, with each company resuming its own operations.

Vodafone and Mannesmann AG 

Considered the largest acquisition in history, UK-based telecom firm Vodafone purchased Mannesmann AG in 2000 for just shy of $181 billion. Like the AOL Time Warner deal, this one also eventually fell apart, forcing Vodafone to write off massive sums of money. 

Anheuser-Busch InBev and SABMiller

The rivalry between these two multinational brewers ended in 2016 when Anheuser-Busch InBev acquired SABMiller for $104 billion. While the previous two examples were failures, this transaction remains active and competitive in emerging beverage markets like Latin America. 

Final thoughts

The vast number of acquisitions that occur every year (nearly 40,000 in 2023) suggests that companies of every size all over the world place faith in M&A to deliver growth. 

The companies that succeed in doing so are the ones that most effectively implement the steps outlined above. If you put in the groundwork and spend time selecting a target company that’s a good fit with your own, there’s every reason to believe your acquisition can drive significant value.