Acquisition refers to the process of one company purchasing or taking over another company, often to expand its operations, gain assets, or increase market share.
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The definition of acquisition in a business context is a circumstance where one company purchases control of another company. Acquiring an existing business is a popular option for businesses wanting to expand or owners wishing to retire or move on to a new venture. Acquisition involves selling some or all of your company to another legal entity or individual. In many cases, acquisitions are amicable, and you can negotiate the terms of the deal.
However, business owners face different legal requirements, depending on the type of sale. When the purchase is an asset sale, the business sells only some of its assets, and you are left to wind up its liabilities. On the other hand, an equity sale transfers business ownership (stock in a corporation or interest in a limited liability company), including all assets and liabilities. You’ll want to consider the type of sale when weighing the pros and cons of acquisition for your business.
Although acquisition has advantages, it also has several potential disadvantages for owners to consider.
When you engage a buyer for your company, it’s a chance for you to negotiate the value of your business. You can choose to sell your ownership after an acquisition, meaning you can retire or start a new venture. In some cases, you could negotiate ongoing employment or a board seat with the acquired company. Because a new company buys you out, you’ll stop having responsibility for corporate formalities, self-employment taxes, and liability.
Depending on the acquisition definition in your state, the business owners must provide unanimous or majority approval of an acquisition. The deal will likely go through several rounds of negotiations before closing. Sometimes advanced business dealings take away from your time spent running the business. Consider whether your company will suffer during your absence. If it does, you might face legal consequences.
In addition, depending on the type of sale, you will owe taxes on your profits from the transaction. A seller usually pays a lower federal income tax rate on capital gains in an equity sale. However, the lower rate isn’t always available in an asset sale. Further, some sellers recognize tax benefits by receiving stock compensation rather than cash.
More importantly, after an acquisition, you lose the power to make decisions about the company. Sometimes the buyer will have a different vision and objectives. Depending on the terms of your deal, you likely won’t be able to protest if the buyer makes changes after the deal is closed.
Corporate acquisitions are common in big business. Here are a few well-known acquisition examples:
Companies may acquire a business to access its client base, operations, or market presence. Acquiring a small business as it reaches its full potential allows a larger business to capitalize on the value of the company’s performance.
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The acquisition is a popular strategy for a business owner to sell their company and realize its value. However, be sure you consider the benefits and drawbacks of your deal before approving an acquisition.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
Written by Team ZenBusiness
ZenBusiness has helped people start, run, and grow over 700,000 dream companies. The editorial team at ZenBusiness has over 20 years of collective small business publishing experience and is composed of business formation experts who are dedicated to empowering and educating entrepreneurs about owning a company.
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