Deciding to acquire another business (or to sell your shares to an external entity) can be an exciting time wrought with emotions. Business acquisitions are complex transactions that involve buying or merging with existing companies. Businesses commonly undertake them to expand their operations, market share, or identify synergy opportunities. However, acquiring a business isn’t as simple as buying a car or a piece of real estate. There are legal, financial, and taxation factors that need to be taken into account–from deciding whether to opt for a merger or an acquisition to tax deductions and other considerations.
Cornerstone Capital takes the stress out of the occasion with loans for business acquisitions with competitive rates. Why add more turmoil and tumult to a time already saturated in decision-making and big changes? Count on us to be a trustworthy lender and advisor in your corner! Start making power moves and invest in your future today.
What Is a Business Acquisition?
As the name suggests, a business acquisition occurs when one entity (usually another business) buys up large amounts of shares (if not all shares) of the target company to “take control” of the business. This occurs in buyers who purchase at least 50% of the company’s shares. This type of maneuver is particularly common among medium and small businesses, and it happens less frequently among larger corporations.
Typically, a business acquisition is associated with a collaborative, “friendly” process rather than an aggressive “takeover.” Another option for businesses looking to expand their reach and grow their brand is a “merger.”
What’s the Difference Between a Business Acquisition and a Merger?
In a business acquisition, the paying company buys out most or all of the shares of a target business, taking over control of the company. In a merger, the two companies work together to create a third, unique entity or business identity for their combined forces moving forward. These two terms are sometimes used interchangeably, though they do refer to slightly different things. However, a “takeover” is almost always described as “hostile,” and is not to be confused with a collaborative merger or business acquisition.
How Do Business Acquisitions Work?
Business acquisitions typically involve two parties: a buyer and a seller. The buyer may purchase the entire business or just a portion of it. In most cases, the buyer will conduct due diligence to examine the target company’s financial statements, legal status, assets, liabilities, and intellectual property. The buyer may use different financing methods to pay for the acquisition. This can be cash, securities, debt, or a combination of these. Once the acquisition is completed, the buyer assumes the ownership and control of the target company.
Are Business Acquisition Costs Tax Deductible?
The costs associated with business acquisitions can be substantial. These include legal fees, accounting fees, valuation fees, due diligence costs, and advisory fees. In some cases, the buyer may also pay a premium above the target company’s market value, known as goodwill.
The tax deductibility of acquisition costs depends on several factors, such as the nature of the acquisition, the accounting treatment, and the applicable tax laws for your business’ structure. In many cases, the costs of acquiring a business are not immediately deductible but need to be capitalized and amortized over a period of years, typically 15 years or less. This means that the buyer can deduct a portion of the acquisition costs each year as a depreciation expense on their tax return.
However, your tax deduction opportunities rely on the way your business is set up–for example, whether it is an “S” corporation or a “C” corporation. For more information on this, get your questions answered by the experienced team at Cornerstone Capital today!
What Are the Types of Business Acquisitions?
Business acquisitions are a powerful tool that can help organizations achieve greater success and growth by expanding their capabilities and portfolio. There are four key types of business acquisitions. These include congeneric, conglomerate, horizontal, and vertical. These can be defined as follows:
- Congeneric Acquisitions: This type of expansive acquisition occurs when a company acquires another in an industry that is closely related but offers different products or services. Congeneric acquisitions occur when a company acquires another business that operates in a related industry but offers different products or services. This type of acquisition enables a company to expand its offerings and increase market share without having to develop new capabilities. For example, if a shoe manufacturer acquires a company that makes accessories like shoelaces, this is a congeneric acquisition.
- Conglomerate Acquisitions: This occurs when a “parent company” buys another company in a completely different line of work. A conglomerate acquisition takes place when a company buys another firm that operates in a completely different line of work. The parent company integrates the new business into its portfolio without necessarily having any synergy or overlap between the two. This type of acquisition is typically done for diversification purposes. For instance, if a food conglomerate buys a fashion retailer, that would be a conglomerate acquisition.
- Horizontal Acquisitions: Often observed in the example of competitors buying each other out, a horizontal acquisition happens when a company buys another in their industry at the same point in the supply chain. Horizontal acquisitions are when two companies that operate in the same industry, at the same point in the supply chain, merge or acquire one another. This form of acquisition is often seen among competitors who want to consolidate their market position, expand services, or eliminate competition. A classic example of this would be when Coca-Cola acquired Thumbs Up.
- Vertical Acquisitions: This is when a parent company buys another business at some other point along the supply chain, such as a vendor or a retailer. Vertical acquisitions occur when a parent company purchases another organization that operates along a different point in the supply chain. These can involve suppliers, retailers or distributors. The idea is to increase operational efficiency by owning multiple components of the supply chain. For instance, if a car manufacturer buys a tire manufacturing business, that would be a vertical acquisition.
How to Purchase Business with SBA Loan
Purchasing a business can be an incredibly exciting and rewarding experience. However, the process can be long and complex, especially when it comes to financing your acquisition. Luckily, the Small Business Administration (SBA) offers loans specifically designed to help small and medium-sized business owners purchase existing businesses.
What’s the Difference Between Buying a Business and Buying a Franchise?
Before we dive into the specifics of SBA loans, it’s important to understand the differences between buying a business and buying a franchise. Essentially, buying a business means acquiring an already existing company outright, while buying a franchise involves purchasing the right to operate a branch of an already established brand. While both options have their pros and cons, franchises generally offer more support and established branding, while buying a business allows for more freedom and creativity in how the company is run.
Understanding SBA Loans for Business Acquisitions
SBA loans are a popular way for small and medium-sized business owners to finance their acquisition. These loans are partially guaranteed by the Small Business Administration, which means that lenders are more willing to offer favorable terms and interest rates. However, obtaining an SBA loan can be a long and complex process, so it’s important to be well-prepared. To qualify for an SBA loan for business acquisition, the business itself must meet certain eligibility criteria. For more information on eligibility, please reference our page on the matter.
Tips for Successfully Navigating the SBA Loan Process
Navigating the SBA loan process can be challenging, but there are several things that you can do to increase your chances of success. First, be sure to have a clear and comprehensive business plan that outlines your goals and projections for the company. You should also work with a reputable business broker or lawyer who can assist you in finding suitable businesses to acquire and negotiating favorable terms.
When applying for an SBA loan, it’s critical to have all of your documentation in order, including financial statements, tax returns, and other relevant paperwork. Be sure to maintain open and honest communication with your lender throughout the process, and be prepared to provide additional information or documentation if necessary.
Streamlined Business Acquisitions with Cornerstone Capital
Purchasing a business with an SBA loan can be an excellent option for small and medium-sized business owners who are looking to expand their operations. However, it’s important to have a clear understanding of the process and be well-prepared to increase your chances of success. By understanding a few key terms and mechanisms regarding business acquisition, you will be better poised to understand your options down the road, increasing problem-solving abilities, agility, and longevity at the same time.
When it comes to acquiring a business, the last thing you’ll want to worry about is finding the capital to see your goals through. This is where the experienced team at Cornerstone Capital comes in–with our dedication to transparency, integrity, and the longevity of your business, we are the trusted source of financial backing for Florida businesses of all sizes. Want to know how we can help you bring your vision to life? Call us today and get your questions answered!
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