Business acquisition occurs when one company purchases a significant portion or the entirety of another company’s shares or assets, thereby gaining control over its operations, management, and decision-making. This process allows the acquiring company to expand its market presence, diversify its product offerings, or achieve strategic business goals.
Acquisitions usually maintain the identity of the acquiring firm while the acquired company may either continue functioning as a subsidiary or be fully absorbed and integrated into the parent company. Acquisitions can be friendly, where both parties agree to the transaction, or hostile, where the acquiring company pursues control without the approval of the target company’s management.
In Nigeria, acquiring a company involves various legal, regulatory, and financial considerations. The process involves thoroughly investigating the target company’s legal, financial, and operational standing to identify potential risks. This article discusses critical factors to consider when buying a company in Nigeria.
More on Business Acquisition
An acquisition is a corporate strategy in which one company gains control over another by acquiring a majority stake in its shares. This typically means purchasing more than 50% of the target company’s stock, thereby gaining decision-making authority and control over its operations. In simple terms, an acquisition occurs when one company buys enough shares in another company to influence or dictate its policies, strategic direction, and financial decisions.
Acquisitions can be carried out through a takeover bid, where the acquiring company makes a formal offer to purchase the target company’s shares, or by gradually purchasing shares on the open market until it secures a controlling interest. These transactions are often pursued to expand market share, diversify product lines, increase competitiveness, or gain access to new technologies and resources.
In most cases, the acquired company is smaller than the acquiring firm and continues to operate as a subsidiary under the parent company’s control. However, depending on the nature of the acquisition, the acquired company may either retain its brand identity and operational independence or be fully integrated into the acquiring company’s structure. Acquisitions can be friendly, where both companies mutually agree to the transaction, or hostile, where the target company resists the takeover.
Regulatory Bodies Overseeing Business Acquisition in Nigeria
The legal framework governing business acquisitions in Nigeria includes these key legislations and regulatory bodies:
1. Companies and Allied Matters Act (CAMA) 2020
This Act provides the legal foundation for corporate transactions, including business acquisitions. It sets out the procedures for mergers and acquisitions, corporate restructuring, and regulatory approvals, ensuring compliance with statutory requirements. Court approval is required for certain transactions, particularly where creditors’ interests may be affected.
2. Federal Competition and Consumer Protection Act (FCCPA) 2018
This Act regulates business acquisitions to prevent anti-competitive practices that could harm market dynamics. It establishes the Federal Competition and Consumer Protection Commission (FCCPC) as the primary regulatory body responsible for approving mergers and acquisitions, ensuring that transactions do not lead to monopolistic or anti-competitive behavior.
3. Investment and Securities Act (ISA) 2007
The Securities and Exchange Commission (SEC), established under the Investment and Securities Act (ISA), plays a role in regulating business acquisitions (M&A) in Nigeria. SEC approval is mandatory, especially for acquisitions involving publicly traded companies or cases where securities form part of the transaction. The commission ensures that acquisition activities are carried out transparently, requiring full disclosure of all material information to safeguard investors’ interests and protect other stakeholders from unfair practices.
4. Nigerian Stock Exchange (NGX) Listing Rules
For publicly listed companies, the Nigerian Exchange Group (NGX) imposes rules and disclosure requirements that must be followed in cases of acquisitions, or takeovers. These rules ensure that investors and stakeholders are adequately informed about significant corporate changes.
5. Foreign Exchange (Monitoring and Miscellaneous Provisions) Act 1995
This Act is relevant for acquisitions involving foreign entities or cross-border transactions, as it regulates the inflow and outflow of foreign capital and investment in Nigeria. The Central Bank of Nigeria (CBN) also plays a role in approving certain foreign investments.
6. Tax Laws and Regulations
Business acquisitions often have tax implications, including capital gains tax on asset transfers, stamp duties on transaction documents, and VAT considerations. Compliance with these tax laws is essential to ensure that the transaction does not attract unnecessary tax liabilities.
7. Labour Act and Employment Regulations
Acquisitions often affect employees, and compliance with labour laws is necessary to address employee rights, redundancy payments, and workplace transitions. The National Industrial Court of Nigeria (NICN) may handle disputes arising from workforce restructuring during acquisitions.
Overall, these regulations collectively ensure that business acquisitions in Nigeria are conducted transparently, fairly, and in a manner that protects stakeholders, prevents anti-competitive behavior, and fosters economic growth.
Factors to Consider When Buying in a Company in Nigeria
For individuals and businesses looking to buy an existing business in Nigeria, below are the conditions to guide you to make informed decisions.
1. Conduct Due Diligence
Due diligence is an important step to be taken in the business acquisition process. It involves conducting thorough research and verification to ensure the business to be acquired is accurately represented and fairly valued. This process helps the acquirer to identify potential risks, such as financial instability, legal disputes, or regulatory non-compliance, before making decisions.
Key aspects of due diligence include understanding the reason for the sale, verifying the company’s legal status, ensuring regulatory compliance, assessing investor agreements, and confirming intellectual property rights. Additionally, industry-specific checks, such as operational licenses and anti-money laundering policies, help mitigate risks and ensure a smooth acquisition process.
2. Conducting Financial Evaluation
One of the benefits of acquiring an existing business is to achieve financial gains within the shortest possible time. To ensure this, the acquirer should assess the financial health and stability of the business to be bought.
Review the company’s assets and liabilities, including accounts receivable, accounts payable, revenue streams, and profit margins, to have an understanding of its cash flow and overall financial position. By doing this, the acquirer can uncover potential red flags, such as outstanding debts, irregularities in financial records, or signs of financial mismanagement.
3. Reputation and Goodwill
A company’s reputation and goodwill are valuable intangible assets that impact its growth, profitability, and long-term sustainability. A strong reputation can enhance customer trust, brand loyalty, and competitive advantage, while a negative reputation can lead to financial losses, regulatory scrutiny, and operational challenges.
Before acquiring a business, you should conduct a comprehensive reputation assessment to determine its public perception and standing within the industry. This can be achieved by analyzing news reports, online reviews, and customer feedback or complaints.
Additionally, engage with industry stakeholders, suppliers, and former employees to provide deeper insights into the business’s credibility. That way, you can develop strategies to either leverage an existing positive brand image or implement corrective measures if needed.
4. Operational Knowledge
A business acquirer must understand the target business’s operations to ensure a seamless transition after acquisition. Key areas to evaluate include working capital, which involves assessing current assets and liabilities to determine financial flexibility.
Also review the supply chain, including vendor relationships and procurement processes, to identify potential risks or inefficiencies. Additionally, analyze the capital expenditure of the company to have an insight into its past investments and future financial commitments.
5. Consider the Legal Liabilities
Checking for any ongoing or pending lawsuits against the company or its key officers is an important part of due diligence. This helps uncover legal risks such as debts, court judgments, or regulatory issues that could affect the company’s finances or reputation. Identifying these risks early ensures they are properly addressed before completing the acquisition.
Conclusion
In conclusion, acquiring a business can be a strategic way to achieve profitability faster, but it comes with huge responsibilities and risks. A thorough assessment of the company’s legal, financial, and operational aspects, including pending litigation, employee structure, and overall business viability is important to ensure a smooth transition.
We advise that acquiring companies must engage professionals like Lawyers, accountants, and business consultants to provide valuable insights and guidance. They will also help to mitigate risks and maximize the benefits of the acquisition. With careful planning and due diligence, the transition can be seamless.
