Reasons Buyers Acquire Businesses - O'Keeffe and O'Malley

Reasons Buyers Acquire Businesses

Dec 07, 2016

There are many reasons to acquire or merge existing businesses, but all are done with the goal of increasing value for buyers, owners and stakeholders. Our buyers tend to fall into these categories:

  • Corporate
  • Private Equity Groups
  • High Net Worth Individuals

Corporate buyers will acquire businesses for a number of reasons that are mostly strategic for growth or diversity. Acquiring a compatible business is one way to grow the company; acquiring a business with complementary and/or related products is one way to diversify. Both can accelerate the growth of the original company in a relatively short period of time. This is also one way to increase one’s geographic footprint.

Buying another business is also a great way to acquire new technology, new products or new systems the business does not currently have. Skilled personnel, patents and new IT systems might be purchased at a lower cost than they were developed. Acquiring a competing business will eliminate some competition, increase market share and offer new advantages in the company’s target market. It will also develop synergies to increase efficiency and productivity by allowing the companies to eliminate duplicate departments and processes.

Private Equity Groups (PEGs) have large sums of money from various investor groups with which they purchase an initial “platform” company. They then look for additional businesses or “add-ons” utilizing the same considerations as corporate or individual buyers to expand the business and create value. PEGs generally are composed of very experienced business managers and advisors who operate and grow the platform business for five to seven years. They then sell the business (often to another PEG or corporate buyer), making money for themselves and sometimes the original owner, as well. Then they start the whole process over again. Successful PEGs have little trouble raising money for their next project once the results of prior successes are evident.

High Net Worth Individuals (HNWIs) are generally defined as individuals whose financial assets, excluding their primary residence, exceed $1 million. HNWIs are looking to invest their available funds into an existing business -- usually around 25% of the purchase price, have the seller carry a small percentage and leverage the remainder. Most HNWIs will play an active role in the running of the business and again, are looking to increase value in the business and make money.

Individual buyers of all net worth will acquire a business to create a job for themselves or they may have always had the desire to be their own boss. Regardless, acquiring an existing business, if you have the funds, is a way to jump-start your entrepreneurial career without the blood, sweat and tears of building your own business from scratch.

All of these buyer types acquire businesses with the focused intent of increasing value for themselves and their stakeholders. They are decreasing the risk of their investment by acquiring an existing entity, rather than taking the risk of investing in the new and unknown.

At O&O, we have relationships with all types of buyers, and can assist sellers in making those connections. For more information, contact us at 913.648.0185.