A company makes an acquisition when it buys the majority or all of the shares of another company in order to take over that business. The acquirer can make choices on newly acquired assets without the consent of the target company’s other shareholders if they purchase more than 50% of the target company’s stock and other assets. 

Acquisitions, which are quite common in business, may take place with or without the target company’s consent. A no-shop clause is frequently present during the approval procedure. Because these enormous and major transactions frequently make the news, we frequently hear about the acquisitions of large, well-known corporations. 

In actuality, small to medium-sized businesses merge and acquire one another more frequently than giant corporations.

Knowledge of Acquisitions

For a variety of reasons, companies buy rival businesses. They can be looking for economies of scale, diversification, a bigger market share, more synergy, price cuts, or new specialized products. The following are some more justifications for purchases.

As a Means of Breaking Into a Foreign Market

The simplest approach to joining a foreign market for a business looking to expand operations is possible by purchasing an existing business there. The acquired company will enter a new market with a strong foundation because the acquired business will already have its own employees, a brand identity, and other intangible assets.

As a Growth Plan

Perhaps a business ran out of funding or encountered logistical or physical challenges. When a company is burdened in this way, it is frequently wiser to acquire another company rather than grow its own. Such a business might search for potential young businesses to buy and add to its revenue stream as a new source of profit.

To lessen competition and excess capacity

Companies may turn to acquisitions to minimize excess capacity, eliminate competitors, and concentrate on the most productive suppliers if there is too much supply or rivalry.

Acquire new technology

Sometimes it might be more cost-effective for a business to buy another firm that has already successfully deployed a new technology than it is to invest the time and resources to develop the new technology from scratch.

Market Cyclicality

Typically, architecture firms don’t have many tangible assets to utilize as a basis for a reasonable book value. If they’ve been very successful and ahead of the curve, they might even own their own office building. Computer equipment, furniture, etc. The list of assets is essentially finished with that. They frequently lack financial resources as well. Due to the way tax regulations affect architectural firms, owners have a strong incentive to disperse all profits to themselves and avoid holding any retained gains. 

Due to marginal cash flow issues and a lack of any form of cash balance on the books, enterprises are often extremely susceptible to market cyclicality, and many of them drastically reduce their workforces at the first sign of a slowdown in business. When your income is unpredictable, your costs are fixed, and you have very little room for mistakes, that is what happens.

There are only really three significant assets that an architecture business owns, none of which can be examined and given a precise monetary value:

  • The reputation of the business and its connections to market
  • The staff members
  • The work portfolio

In a valuation, all three of those items are combined under the heading “goodwill,” which is covered up with a lot of hand-waving and justifications regarding prior performance indicators from the previous three and five years. Despite our desire to physically tether interns to desks, the company doesn’t even “own” the first two, and the third is what you might refer to as a “wasting asset.” Despite the fact that you own it, you must always labor to keep its value.

If you are interested in more articles like this, here’s one about a mid-size architecture firm.