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Business acquisition is the process through which one company gains control of another\u2019s operations, assets, and decision-making authority. It\u2019s a strategic move that helps a company (which is acquiring another company) expand its operations, enter new markets, and gain a competitive edge.<\/p>\n\n\n\n
Business acquisition typically happens when a company buys a complete or significant stake in another company. The acquisition process generally begins when a larger business identifies and approaches a potential target company. This is followed by detailed due diligence, negotiations, and finally, the signing of a purchase agreement. Once the acquisition process is completed, the target company becomes a subsidiary of the acquiring firm, and its existing owners become shareholders of the new group.<\/p>\n\n\n\n
However, purchasing or acquiring another business often involves a great deal of financial and legal commitment. A business acquisition loan can help you meet these expenses without depleting your cash reserves. Continue reading to learn the business acquisition loan\u2019s meaning, benefits, and more.<\/p>\n\n\n\n
A business acquisition loan is a special type of funding given to self-employed individuals and companies to purchase an existing business or acquire a significant stake in another firm. Such a loan provides the necessary capital to cover the cost of acquisition, buying assets or shares, and even merging business operations.<\/p>\n\n\n\n
Several banks and Non-Banking Financial Corporations (NBFCs)<\/strong><\/a> provide business acquisition loans in India. These loans are particularly useful for businesses aiming to scale quickly, enter new markets, or consolidate their industry position. They can be secured (backed by collateral) or unsecured.<\/p>\n\n\n\n The key features of business acquisition loans include:<\/p>\n\n\n\n A business acquisition loan helps you buy another business or firm using borrowed funds. It works pretty much like any other business loan<\/strong><\/a> in India; the only difference is that it\u2019s structured to finance the acquisition process. Below is a simple, step-by-step walkthrough for business owners or entrepreneurs looking to apply for a business acquisition loan:<\/p>\n\n\n\n Before anything, you must know the company or business you\u2019re targeting. It may be operating in the same domain as yours or a different one. The aim is to expand your venture and eliminate competition. In the next step, you finalize a deal with the target company. This can be the most crucial step and requires diligence. Once you have finalized the deal, you can calculate the expenses required to complete the acquisition process.<\/p>\n\n\n\n Now you can apply for a business acquisition loan with a lender. Be ready to explain how you are going to use the funds and how you are planning to repay them. Before applying, do not forget to check your lender\u2019s eligibility criteria<\/strong><\/a> for the loan.<\/p>\n\n\n\n Gather and submit the required documents<\/strong><\/a> to the lender. It may ask for your basic KYC documents (PAN card and Aadhaar card) along with your business registration certificate, audited financial statements, Income Tax Returns (ITRs), bank statements, the acquisition agreement, and valuation report, among others.<\/p>\n\n\n\n Once you have completed the application process<\/strong><\/a>, your lender will initiate a verification process. Upon successful verification, it will approve and disburse your loan. The process may take a few working days, provided the documentation is complete and accurate.<\/p>\n\n\n\n After a successful acquisition, you can start repaying the loan amount as per the agreed-upon terms. For instance, you can choose to repay in Equated Monthly Installments (EMIs)<\/strong><\/a> for a pre-defined tenure. Once you repay the entire loan amount, the lender will issue a No Due Certificate.<\/p>\n\n\n\n <\/p>\n\n\n\n There are multiple types of business acquisitions based on the structure and intent of the deal. Understanding these types helps you choose the right financing strategy and evaluate associated risks.<\/p>\n\n\n\n Explained below are the common types of business acquisitions along with notable examples from the Indian market:<\/p>\n\n\n\n When a company only acquires the target company\u2019s assets, it is known as an asset acquisition. The assets may include physical assets, such as machinery, equipment, and unpaid invoices. They can even include intangible assets, such as trademarks, copyrights, etc.<\/p>\n\n\n\n A very recent example of asset acquisition in India is Zomato\u2019s acquisition of a grocery-delivery start-up, \u201cBlinkit\u201d. The former acquired the technology, customer base, and delivery network to enter the quick commerce market.<\/p>\n\n\n\n As the name suggests, stock acquisition occurs when a company buys complete or controlling shares of another company. In return, the acquiring company pays in cash or provides shares to the shareholders of the target company. Stock acquisition results in either full or significant ownership and control over business operations and decisions.<\/p>\n\n\n\n One of the largest stock acquisitions happened in 2018, when Walmart acquired a 77% stake in Flipkart (the largest e-commerce company in India). The deal, comprising 16 billion US Dollars, gave Walmart ownership rights and decision-making power.<\/p>\n\n\n\n An acquisition that happens with the mutual consent and agreement between the acquiring and target companies is known as a friendly acquisition. Such an acquisition often benefits both the companies involved and takes place after their boards\u2019 approval.<\/p>\n\n\n\n Most business acquisition examples you come across are friendly acquisitions. The biggest such acquisition to date is Vodafone\u2019s acquisition of Mannesmann in 1999. Another common example of such acquisition from India\u2019s perspective is Byju\u2019s acquisition of Aakash Educational Services.<\/p>\n\n\n\n A situation wherein the acquiring company bypasses the target company\u2019s management and goes ahead with the acquisition after gaining shareholders\u2019 approval is termed a hostile acquisition. This type of acquisition is usually met with resistance from the target company and may or may not benefit both the partners involved.<\/p>\n\n\n\n For example, Larsen & Toubro launched a successful acquisition campaign of Mindtree by acquiring shares from a strategic investor. It was one of the first successful hostile takeovers in the Indian IT sector, which later turned friendly.<\/p>\n\n\n\n A strategic acquisition is made to strengthen market position, gain technology, or expand customer base. For example, Zomato\u2019s acquisition of Blinkit was strategic. The company wanted to expand into the quick commerce industry through the strategic acquisition of Blinkit.<\/p>\n\n\n\n When the motive of the acquisition is purely financial, it is known as a financial acquisition. The acquiring company focuses purely on making profits and investment returns from the target company.<\/p>\n\n\n\n Opting for business acquisition financing can provide you with the resources and flexibility needed to purchase\/merge with another business or expand your existing business. It helps reduce upfront cash burden and enables unhindered business growth.<\/p>\n\n\n\n Below are the notable advantages of acquisition loans:<\/p>\n\n\n\n Business acquisition financing allows easy access to the capital required for acquiring another business. It ensures you won\u2019t have to disrupt your working capital<\/strong><\/a> or cash flow for such a large-scale transaction.<\/p>\n\n\n\n In the corporate world, the one who makes the first move is the one who wins most of the time. With a business acquisition loan, you won\u2019t have to wait too long to fulfill your vision of acquiring established businesses.<\/p>\n\n\n\n Interest paid on acquisition loans may be eligible for tax deductions under certain conditions. As per Section 37 of the Income Tax Act of 1961, you can claim the interest paid towards your business loan as tax-deductible under the \u2018business expenses\u2019 head. This helps in reducing your overall cost of borrowing.<\/p>\n\n\n\n A business acquisition loan can indirectly help you improve your credit score. When you avail of a loan and repay it in a timely fashion, it boosts your credit score. In turn, it can help you qualify for larger-value loans in the future.<\/p>\n\n\n\n Lenders such as Tata Capital<\/strong><\/a> understand your precise business requirements and offer tailor-made financing solutions. Additionally, it ensures quick processing and disbursal so that you won\u2019t have to wait to expand your business.<\/p>\n\n\n\n Understanding your eligibility for a business acquisition loan is crucial before applying for it. Although the eligibility criteria may vary from one lending institution to another, they usually look at several common factors, including your age, business experience, annual turnover, and CIBIL score. Here\u2019s what they usually ask for:<\/p>\n\n\n\n <\/p>\n\n\n\n The interest rate<\/strong><\/a> is the rate at which you need to pay interest to the lender on your loan. Lenders usually determine business acquisition loan interest rates based on your age, CIBIL score, past business performance, loan amount, tenure, and the existing repo rate. Typically, they range between 12% and 30% per annum for most banks and NBFCs. If you want the interest rate to be the same for the entire loan tenure, you can opt for the fixed rate. However, if you want your business acquisition loan interest rate to change with the repo rate, you can opt for a floating rate of interest<\/strong><\/a>.<\/p>\n\n\n\n\n
How does a business acquisition loan work?<\/strong><\/h2>\n\n\n\n
1. Step 1 – Identify the target company<\/strong><\/h3>\n\n\n\n
<\/p>\n\n\n\n2. Step 2 – Finalize the deal and chalk out the expenses<\/strong><\/h3>\n\n\n\n
3. Step 3 – Apply for the loan<\/strong><\/h3>\n\n\n\n
4. Step 4 – Submit the required documents<\/strong><\/h3>\n\n\n\n
5. Step 5 – Wait for approval<\/strong><\/h3>\n\n\n\n
6. Step 6 – The repayment begins<\/strong><\/h3>\n\n\n\n
Types of business acquisition<\/strong><\/h2>\n\n\n\n
Asset acquisition<\/strong><\/h3>\n\n\n\n
Stock acquisition<\/strong><\/h3>\n\n\n\n
Friendly acquisition<\/strong><\/h3>\n\n\n\n
Hostile acquisition<\/strong><\/h3>\n\n\n\n
Strategic acquisition<\/strong><\/h3>\n\n\n\n
Financial acquisition<\/strong><\/h3>\n\n\n\n
Benefits of business acquisition loans<\/strong><\/h2>\n\n\n\n
Access to capital<\/strong><\/h3>\n\n\n\n
Faster business acquisition<\/strong><\/h3>\n\n\n\n
Potential tax benefits<\/strong><\/h3>\n\n\n\n
Improved credit score<\/strong><\/h3>\n\n\n\n
Quick disbursal<\/strong><\/h3>\n\n\n\n
Eligibility criteria for business acquisition loans<\/strong><\/h2>\n\n\n\n
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Interest rates and charges on business acquisition loans<\/strong><\/h2>\n\n\n\n