Why Acquire A Local Company Instead of Setting Up Your Own?
By: Noel C Ducusin
Some owners are put off by the time and effort required to set up their local businesses especially when it comes to industries that are highly regulated like banking, insurance, and mining, where, in addition to basic setup papers, special licenses need to be applied for with the specific government regulator covering that industry.
Other times, owners are averse to the risk of having to reinvent the wheel so to speak and prefer to take over an existing local business that has proven its initial viability. This could be because each market is somewhat different even though the same product or service is being sold globally.
In this article, we will discuss the main instances where it makes more sense to acquire an existing local business rather than set up your own from scratch.
Speed
More often than not, local companies have their company registrations and permits and have some initial market penetration for their product or service.
It's not easy to launch products from scratch. When someone else has done it for you, or better yet, has already made some sales and initial headway, then that is indeed a big headache removed for you. These businesses may already have set up initial relationships with distributors and service providers to ensure both the delivery and promotion of their products.
Even if your product is not exactly the same as the local company's products, it is likely that you could leverage their existing supply chain, distribution network, and marketing mechanism with minimal adjustments.
Finally, hiring and qualifying employees and consultants takes time to run your business. Oftentimes, these local companies already have a core group of consultants and employees who have demonstrated their ability to do the job.
Special Permits and Accreditations from Industry Regulators
Certain local industries are highly regulated. In order to participate in these industries, companies need to pre-qualify and meet certain requirements, e.g. capitalization, previous track record, technical competence, and the like.
After these qualifications are met, the applicant typically has to go through a separate permitting process that may include a presentation of its business model, briefings on its systems and procedures, plus procurement of additional government compliances.
Some may not mind this intensive process, but a few wills, especially if they have a timetable to keep or have limited personnel to do the initial setup.
Highly regulated industries that require extensive processes, aside from the above-mentioned banking, insurance, and mining, including telecommunications, large-scale government infrastructure projects, and pharmaceuticals.
In these instances, the target company to be acquired already have these additional licenses from the relevant government regulator and accreditations from customers and partners. Acquiring these companies, or at least acquiring a major preliminary stake in them, will make the entry process so much easier.
Existing Contracts or Assets
In some cases, is not a matter of having to hurdle the bureaucratic licensing requirements but rather the acquisition of assets or the right to use them.
An example is the purchase or long-term lease on prime real estate or industrial facilities that are income generating over the long term like twenty-five (25) years or more.
Some companies that are holding these contracts will agree to cash out at a certain strike price instead of having to worry about managing the business for the long term. The reasons vary but include changes in investment priorities, generational changes in the family owners, and of course, business reverses.
Existing Track Records
Existing track records can simply mean being in existence as a company for a specified number of years.
This is particularly important if your goal is to obtain local bank financing. Many banks will not loan to a company that has been just set up. This means that you will need to finance your business operations including the acquisition of preliminary assets or inventory from cash. If the business that you will acquire already has been in existence with commercial operations for two years or more, the likelihood of obtaining bank financing is much increased especially when you add capital to the business.
Another example is listing in the local stock market or getting licenses to issue securities. The government regulator here will also require that the company is in business for a specified number of years complete with proper financial reports showing both good regulatory compliance and viability as a business for purposes of protecting potential investors.
If you set up your company from scratch, you will have to wait these number of years before you can even attempt to get financing through securities or the public markets. If you can find a company that already has this track record or is already about to hit minimum time and compliance requirements, then it will make your entry all the much faster and easier.
We will be producing a separate resource on how to do due diligence on a target company so please stay tuned for that.
Finally, in case you are a local company and are looking to be acquired by a larger company, whether offshore or not, the following scenarios are worth preparing for.
We will also be producing a separate resource on that as well, so please stay tuned.
If you are viewing a summary of this post via email please click below to view the entire post.
Thank you!
Suggest Content
If you are receiving this article via our email newsletter then that means that you are already a member of our Community and may suggest content simply by reply email. If you found this article helpful, please share it by forwarding the email to those who might benefit. Thank you!
If you are not yet a member of our Community or mailing list, please join by clicking the button below. Upon joining, you will also get our Free Guide on the Seven (7) Things To Consider Before Setting Up Your Business in The Philippines.
We look forward to a long-term relationship with you and many thanks in advance.
Market Entry Consult
If you are a foreign investor or foreign business owner who is ready to actively explore the local market, partner with local companies, setup your own local subsidiary, or invest in deals, projects, or enterprises in your specific market sector, then you can request at consult at our Market Entry page.
About the Author
Atty. Noel C. Ducusin is the senior and founding partner of the N. Ducusin & Partners Law Offices - a law firm based in Metropolitan Manila, Republic of the Philippines that specializes in Corporate Advisory, Cross Border Regulatory Matters, Mergers & Acquisitions, and Commercial Litigation.
Atty. Ducusin is also the President & Sole Director of DoingBusinessPH OPC - a company dedicated to empowering foreign investors to do business in the Philippines through online executive education programs, digital books, seminars, as well as online and offline events.
His mission for this Community is to help foreign investors, business owners, and managers by breaking down complex legal concepts or dense technical material into straight-forward actionable legal information for better business decisions.
This is not the place for academic writing and legalese will not be tolerated here. The simpler and the more practical the better.
“Everything should be made as simple as possible, but no simpler.” – Albert Einstein