The Advantages and Disadvantages of a Company Buyout
There may come a time when the management of one company considers giving a buyout offer to another company. There will probably be many advantages and disadvantages on both sides. Several things must be taken into consideration for this to be successful. The agreement should be structured so the needs of both companies are met. Neither side will get everything they want or be required to give up everything. All the pros and cons of a company buyout need to be carefully considered on both sides.
ADVANTAGE: Gaining New Products Or Technology
There are situations where an established company desires to purchase a smaller company that has developed a very promising new product or technology. This can quickly benefit each company. The smaller business will have access to more and better resources. It will also be able to offer its products or technology to a larger customer base. The larger business will be able to incorporate new products or technology into their existing product line. This can be done without paying to license the acquired company’s product or technology.
DISADVANTAGE: Increased Debt
It’s possible the larger company may have to borrow money to acquire the new company. This will change their debt structure and increase any loan payments on the books. This also can require a company to make drastic cuts in their expenses. It may require layoffs or selling another part of the business to remain profitable. The money a company uses to buyout a business also takes funds away from any in-house product development.
ADVANTAGE: Reduced Competition
When a business is able to purchase its competition, it is able to increase its profits. The buyout will provide them with an increased scale of economics. It will also eliminate the need to participate in a price war with the competition. This can have a positive impact on customers if they experience decreased prices for a company’s products or services. Less competition means a business can spend more time expanding.
DISADVANTAGE: Loss of Key Personnel
Company buyouts can be viewed as a time for founders or key personnel to leave for a new challenge or retirement. Depending on their contract with the business, they may sell their interest to the company or an outside business. It can be a challenge for a company to find individuals with the same level of knowledge and experience. This may cause a period of adjustment that could be hard on the business.
ADVANTAGE: Increased Efficiency
A buyout may do away with any areas of product or service duplication between businesses. This could lead to a raise in profits resulting from a decrease in expenses. The companies involved in the buyout will be able to compare their processes and choose the best one. The newly formed company will be able to get better prices for products, insurance and more. Office spaces and other working areas can be combined for additional cost savings.
It will take time to integrate the procedures and personnel of one company into another. The two companies may do similar things but have very opposite corporate cultures. Resistance to change is a very real thing in the business world. It has been known to cause serious problems. Unless there is a plan to address integration issues, it could take a long time and become costly. It could lead to a loss in productivity and have a negative impact on the newly formed business.