What do you need to own a company - 51% stock or majority?

Businesses can only run effectively if their core team of leaders and management function seamlessly, with an astute understanding of everyone’s responsibilities. However, when it comes to doing the most vital aspect of taking major business decisions, only the business owners have a say, whereas the rest of the company shall simply comply with their instructions.

Who is a Business Owner?

Business owners are individuals who control the functioning and finances of a business. Owners may choose to run their business alone or with a group of people. However, in both cases, owners have authority over the company and are responsible for laying down the strategy, training staff, etc.

Owning a company does not necessarily mean that you started it. You can be the owner of a company if:

• You own 51% of the company’s stocks, or
• You own less than 50% of the company’s stocks, even 1% will count. However, in this case, the controlling authority and decision-making power will be distributed amongst all owners (stakeholders) of the company.

How to Own a Company?

• Plan inorganic growth by acquiring companies,
• Determine the key aspect that must be looked for in a potential acquisition,
• Look for and finalize a company,
• Plan,
• Evaluate,
• Negotiate,
• Conduct due diligence,
• Draft contract of acquisition and other relevant documents,
• Fund the operation,
• Closing.

Let us now dive in a bit deeper into the above-mentioned steps of owning a company.

Prepare an Acquisition Strategy

The first step on the road to owning a company is setting a goal – deciding exactly what you aim to gain from the business. There are two types of acquisitions:

• Horizontal Acquisition (a company acquires another company/direct competitor)
• Vertical Acquisition (a company acquires an additional company to boost growth)

Some key advantages of such acquisitions include:

• Increasing the company’s value by using extra funds.
• Less cost for startups.
• The value of a group of companies is relatively bigger than the individual value of the same companies.

Note: You must also take into account the fact whether the acquisition is industrial or financial.

Determine the Purpose of the Search

You need to determine the main aim behind acquiring companies. This shall also help decide which company to go for after evaluating whether the company meets your requirements. Some key reasons behind such searches are:

• Revamping Management: The management of the company being acquired needs to be improved and you have the right tools to help the former do so.
• Geographical Reach: The company being acquired covers areas that you want to have your business in.
• Treasury: The company being acquired needs funds and you can provide them with the same in exchange for equity.
• Business Areas: The company you plan to acquire conducts business in areas that are complimentary to your business.
• For International expansion.
• To eliminate competition.

Searching for Potential Acquisitions

• By understanding the competence of a potential acquisition, you can determine the current state of the company along with the areas you may benefit from acquiring them.
• You may hire proficient professionals to handle this task for you.
• Your financial institutions may recommend you and inform you of such opportunities.

Planning the Acquisition

You must reach out to one or more companies that meet your acquisition standards. The main goal of doing this is to get as much information about them as possible and determine whether there are any chances of you acquiring them.

As this point, companies usually sign a non-disclosure agreement (NDAs) as they share confidential information if they wish to proceed with the acquisition.

Evaluating the Target Company

If any company interests you, you may make a preliminary request to get some additional information about the company. This shall further help evaluate the company and realize whether going forward with the acquisition would be beneficial or not.

Negotiations and Signing of Letter of Intent (LOI)

While it is non-binding by nature, the first offer you make defines certain guidelines for the transaction. Once you’ve made the first offer, a letter of intent may be signed to inform the company about your genuine interest in acquiring them. After such an offer is made, the companies begin negotiations in a more detailed manner.

Conduct Due Diligence

Companies begin their due diligence process once the LOI has been signed and accepted. The aim of doing this is to confirm and correct, if needed, your evaluation of the company being acquired. The aspects reviewed as part of the due diligence process include:

• Commercial: Review the corporate aspect of the company – assets, liabilities, licenses, customers, industrial & intellectual property, data protection, etc.
• Financial: Review the accuracy of the figures provided and calculate the value of the company accordingly.
• Fiscal: Review the fiscal aspects along with their possible contingencies.
• Labor: Review the status of the employees.

Prepare the Documents Required for the Acquisition

The results of the due diligence process are vital when drafting documents for acquisition and planning post-acquisition strategies. At this stage, the cost of acquisition is of utmost importance along with certain other aspects. Some of such aspects are:

• Mode of payment,
• Assurances,
• Power division,
• Provisions that shall govern the companies like transmissions, decision-making, etc.
• Tips to retain valuable people in the company.

Fund the Operation

After analyzing the company to be acquired at different stages, you must have an estimate of how much funds would be required to complete the transaction. In a lot of cases, the transaction’s timing depends on the inflow of funds from your (the acquirer’s) end.

Certain requirements that the acquiring company must meet are:

• Low debt.
• Stable cashflow to help deal with debts.
• You should be a stable or slow-growing company. (If you were a fast-growing entity, you would require the liquidity of cashflow for growth)
• You should have an experienced team.
• There should be some possibility to reduce costs.
• You should have some non-strategic assets that may be sold to obtain liquidity.
• Directors of your company are members of the company.
• There is not a huge working-capital requirement, and it is not a highly demanding investment program.

Closing the Acquisition

Once the acquisition has been completed and necessary documents have been duly signed, the integration of the two companies begins. This is usually quite the complicated aspect as two different business processes are to be merged. This can extensively affect the internal operations, computer applications, etc.

Usually, such integrations are not conducted on the spot but are planned for in advance. Businesses cannot afford to completely halt their operations, as it could have drastic effects on their business. Post integration and merger of two companies, there is a possibility of even the internal processes and decision-making authority getting changed. This is also why integration processes are planned meticulously from the early stages of the acquisition.

Advantages & Disadvantages of Small-Business Ownership

Being an owner of a small business has its own advantages and disadvantages. Entrepreneurs must compare these pros and cons to determine whether the risks of owning a business are worth the rewards.

Read on to familiarize yourself with the advantages and disadvantages of owning small businesses.

Advantages of Small-Business Ownership

• Independence: You will be your own boss and make all the decisions related to the business. You will decide your working hours as well as your salary and if you want to go for vacations. Numerous entrepreneurs prefer controlling their destiny even after weighing the risks of being a business owner.
• Financial Gain: Entrepreneurship brings more opportunities of achieving financial benefits as compared to when you work for someone else. You are freed from the income restraints that bound you when working as an employee.
• Control: As a business owner, you have complete control over the functioning of your company. You are involved in the entire operation of whatever is being worked on at your company. From the concept and design to creation and delivery, you are aware of all the processes and have a say in everything as well.
• Prestige: You gain the status of being someone who is in charge. This is something that encourages people to pursue their dreams and start a business of their own.
• Equity: As a business owner, you build equity, which you may choose to keep, sell or just pass onto the next generation. Besides, it is not uncommon for a businessperson to own several businesses in their lifetime. They may establish a company, run it for a while, build equity, and then choose to keep it and let it grow or simply sell it to finance their next venture.
• Opportunity: Entrepreneurship allows individuals to come across opportunities to contribute. Such contributions may be efforts towards society, for the welfare of elderly, children or similar individuals who need some kind of help. Besides, some businesspersons bring a change in the society single-handedly through their innovations.

Disadvantages of Small-Business Ownership

• Time Commitment: When opening a business, you are highly likely to have a small number of employees working for you. As such the workload and hence, the time commitment required from you may be quite high. You are bound to be overwhelmed with all the responsibilities when starting off and can expect a lot of strain on your family and friends due to your constant need to attend to your work.
• Risk: Even if you plan the business to minimize the risks and liabilities, you will still not be able to completely eliminate them. Unlike when employed, you face a financial risk along with several other risks like product liability, disagreements between employees, etc.
• Uncertainty: Even if a business is flourishing at the beginning, there is no guarantee that it will continue to do so after a few years. External factors, such as drops in the economy, new competitors, changes in consumer demands, etc., constantly make you uncertain about your business’ future.
• Financial Commitment: No matter how small a business is, you always need some capital to start it off. A lot of people rely on their personal savings, investments, etc. to fund their business ideas. As a result, these funds will not be available for any personal or family use, if needed.

Conclusion

After reading this article, you must know that owning a business has its own pros and cons. This makes it imperative to weigh both of them and evaluate whether the risks are worth the reward before starting off any business venture.

Besides, you may not necessarily need to start a business either. If you own 51% of a company’s stock, you shall be considered the owner of the company as well.