Reasons for buying a company: Valid and not so valid.

The main idea of this text is to understand why companies merge, that is to say, to try to understand the motivations that move company managers to carry out an operation as complex as the purchase of a company, as part of their growth plan. Throughout the How-To, we will keep in mind that the main objective of a company must be: the maximization of the value of the company, that is to say, the creation of value for the shareholder. And all valid reasons for the purchase of a company to carry out an operation of purchase of companies must go hand in hand with this main objective that all companies must have. 

On the other hand, it is essential that we do not look for just one single reason for buying a company. There are usually several motives that lead to this decision and they are usually a mixture of one or the other. And within these reasons for buying a company, there are some valid reasons and others that are not so valid to argue in favor of acquiring another company.

Reasons for buying a company: Valid and not so valid.

Let's start with the valid or reasonable motives, which from an economic point of view respond to the main objective mentioned above. Obviously, if we want to create shareholder value, the best way to do it is to try to increase revenues and reduce costs. This is a reason why there is no specific method and a scheme of how to do it, since each company is different, but it is true that the search for these reasons for the purchase of a company makes it easier to gain market share.

The second most common valid reason is to bet on a better management of the company that will increase the market value. The most difficult part of this method is to really know who and in what way a company can be better managed. The challenge facing a new team or a new way of managing is to see where are those errors or points of improvement that make a company not as profitable as it could be.  Later we will see that not all the ways or the deep reasons for which to manage a company are valid.

Another valid reason is to approach it from a tax perspective. That is, to reduce tax payments by merging or acquiring a company in such a way that the tax burden of both merged companies is better than if they were considered separately. Again, this is usually a motive accompanied by cost reduction and increased revenue.

The last of the reasons for the buy The valid business case we want to highlight is when a company has a large surplus and has no other way to reinvest it. However, once again, the operation must have a positive net present value, i.e., creating value for shareholders. It is important in this section not to fall into the way of reasoning: "Since I have money to spare, I will invest". Rather, once again we must focus on a positive net present value. 

Reasons for buying a company: Valid and not so valid.

The motives for buying companies that we will see below are those that do not pursue the general objective of the company. The first and perhaps the most common motive is to acquire more companies so that the risk is lower. It is to think if I have more, less danger of something going wrong. And if it goes wrong, it is only a small part of everything I have.

However, this approach does not generate any additional wealth for the shareholder and therefore does not make economic sense. It is true that risk avoidance is a procedure that has to be carried out, but a purchase decision cannot be based on making the purchase to avoid risks. On the contrary, you should think about what risks to avoid once the company is bought or think about what are the risks of buying the company.

The second invalid reason for the purchase is personal aspects. A manager's motivation to command more or simply manage more people is not a valid reason. Moreover, it must be remembered that an increase in the number of people or staff is not the same as an increase in financial profitability. Therefore, being more does not mean being better off. It is also important to mention that it is good to want to be bigger, as long as it is not only for personal motivation and pursues the same objectives of the company. It is very important that the personal objectives of the managers and the objectives of the company are the same.

Otherwise, the personal objectives and individual interests of each person start to come into play, which often have a negative impact on the company itself. In the same way that a manager should not impose his own valuation system instead of establishing the one that the market determines objectively.

Finally, another invalid reason for buying a company is to approach the purchase of companies from a guerrilla approach as: to avoid attacks or in a defensive way. It is more complex and deeper to start this process with such a strategy.

In conclusion, whenever we have doubts about whether the reason that leads us to acquire companies is good or not, we must ask ourselves if it pursues our most important objective, maximizing the value of the company. It is also important that the more good reasons that help us to make the decision, the clearer the whole process will be and probably the better the decision we will make. Finally, as we always recommend, if you have any doubts about a service such as the purchase of a company, the best is to turn to an expert. We believe that it is one of the most important decisions for an entrepreneur and doubts about why a purchase is being considered can be key to the follow-up process.