How can you protect your small business from a takeover?

We take a look at the ways you can protect your business from an unwanted acquisition, otherwise known as a hostile takeover.

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Elon Musk's recent acquisition of Twitter has caused quite a stir amongst the business community, particularly as the acquisition was way more hostile than it was pleasant.

Just weeks after Musk rejected an offer to sit on Twitter’s board of directors after founder Jack Dorsey stepped down as CEO, the world's richest man made a $43bn bid to buy the company.

This was rejected by the Twitter board, who began considering ways to rebuff Musk’s advances in an attempt to stop a takeover. However on April 25th, Twitter’s directors accepted Musk’s latest offer of $44bn for total control of the company.

This aggressive takeover approach from Musk has left many business owners questioning how they would protect their own business should they be put in a similar situation.

It is certainly difficult to know exactly what to do, and what options are available to you should you find your business the object of a hostile takeover bid.

Which is why we’ve asked experts from around the UK to offer their insight and advice to business owners regarding acquisitions. This way, if one day you are faced with the prospect of having to sell your business, you know what to do.

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Acquisition vs hostile takeover: what's the difference?

These two terms are typically used interchangeably in the business world, but rest assured – there are very clear differences between them both, which you may experience first-hand during your time as a business owner.

Acquisitions

If your company is subject to an acquisition, you have agreed in advance to the sale of your business to another company. The acquiring company takes control of your businesses operations and assets, and will own either all or a majority of its shares.

Acquisitions can sometimes be referred to as ‘friendly takeovers’, and why not? You’ve just made money selling your business to the ideal company!

Data from PwC revealed that global mergers and acquisitions in 2021 exceeded 62,000, up a huge 24% from 2020. But despite this, the number of mergers and acquisitions in the UK dropped sufficiently in 2021 compared to 2020, from 3,367 to 1,624, according to the latest Institute for Mergers, Acquisitions, and Alliances (IMAA) data.

Don’t let these UK figures deceive you. Acquisitions are very much commonplace in the business world, and as the UK economy slowly recovers from the fallout of the COVID pandemic, they will increase across the board.

Hostile takeovers

But what about hostile takeovers? Unlike acquisitions they are far from friendly in that target businesses are purchased by an acquiring company against the wishes of the businesses directors and majority shareholders.

Perhaps the most famous example of a hostile takeover in the UK was that of Cadbury PLC by Kraft Foods Inc back in 2009. Cadbury rebuffed Kraft’s advances as unwanted and undervalued, and the situation escalated so much so that even the British government became involved in the takeover debacle.

cadbury kraft

Hostile takeovers are ruthless because they can happen so quickly (just look at Musk’s Twitter takeover turnaround) – saving the acquiring company time negotiating with the target business.

They typically occur in two ways…

Tender offering

Tender offering is the most common approach and is when the acquiring company will go directly to the businesses shareholders with a tender offer, which is essentially an overpriced premium figure for their shares that is too good to turn down.

Once they’ve purchased enough shares to have control of a majority share of your business, the hostile takeover is complete.

Proxy contest

The second way a hostile takeover occurs is known as a proxy contest. This is the hostile acquiring company’s attempt to remove current members of an executive board team and replace them with directors that are in support of the takeover.

Microsoft attempted to do this when bidding for Yahoo back in 2008, but gave up its attempts after it decided to stop pursuing the acquisition.

Tender offering only works on listed companies (those that are operating on the stock exchange) so the majority of smaller companies should be safe as they are typically privately owned.

It is however undeniably important to be aware of these takeover methods whenever you do decide to take your company public.

And even though you may not be subject to a traditional hostile takeover, there are still ways you can protect yourself from a takeover that is far from a friendly acquisition.

How at risk is my small business from a hostile takeover?

According to Dr Christopher Kummer, President of the Institute for Mergers, Acquisitions & Alliances (IMAA), startups and SMEs are prone to frequent hostile and at times aggressive takeovers.

Particularly those that have come out of the pandemic unscathed, passed a real-life resilience test, and proved their value. Kummer says:

“Aggressive takeovers of startups are very common and are not reserved to MNCs (multinational corporations) being the acquirer; many SMEs also seek to accelerate their growth through the acquisition of startups.

“If a business is not keen on selling, acquirers tend to focus on the different shareholders and/or board members and management within the target company and convince them to sell.

“Another method could involve the acquirer threatening to enter the market and compete with the target, hence pressuring the business into selling instead of worrying about increased competition from an established company.”


Why would a company want to acquire my business?

Now you know the difference between acquisitions and hostile takeovers, it's important to understand what an acquiring company looks for when it is targeting a business and preparing a bid.

We’ve listed a few of the main factors that could make your business more susceptible to a takeover attempt:

1. You are competitors in a highly competitive market

If a business wants to increase its market share in a particular industry, a great way to do this is by taking over one of its rivals and in turn acquiring its assets.

Examples of current competitive markets include ecommerce (online) stores and digital marketing agencies.

2. You have access to new technology or skills

Whether you are the next Steve Jobs or your business has created industry leading technology, you are more likely to attract acquiring businesses that want to use this to their own advantage and for their own products.

Sometimes it's far cheaper to buy technology than to hire a whole team to develop it…

3. You are a way into a foreign market

Many acquiring businesses may be looking to expand their operations overseas. This isn’t the easiest and cheapest thing to do, and often it is more viable to purchase a company that already has roots in a foreign market than to try to grow your own… one of the fundamental decisions behind Kraft’s acquisition of Cadbury!

4. You present huge potential and have created a scalable business

You have an amazing business idea, you’re executing it well, achieving success, and making money in the process! It all sounds a bit too good to be true, doesn’t it?

Acquiring companies can spot potential miles off, and if they see a successful startup that can be scaled, they may very well attempt to take it for themselves.

5. You don’t have the capacity to improve company performance

You may find yourself in a situation where you can no longer grow your business with the business tools at your disposal.

This unfortunately does happen and can result in more established, larger businesses taking the company off your hands as they have the capacity and resources to grow the business and make it more profitable.

6. You have recently listed your business on the stock exchange

Once you become a public company, you could be at risk of a hostile tender offer takeover attempt.

Further clarifying the reason companies engage in acquisitions, Dr Kummer of the IMAA says:

“While older M&A waves’ main rationale may have been controlling and eliminating competition, today’s acquisitions are much more strategic and seek to acquire small companies to speed up technologies they do not want to develop in-house due to spent time and involved costs.

“Thus, they hope to gain a competitive advantage, a larger and/or new client base, which in turn will potentially lead to higher profits.

“Another factor to consider would be that startups are generally easier targets due to their size. It requires less effort, time, and cost to acquire and integrate (or not to integrate at all) than publicly listed companies.”

How can I protect my business from a takeover?

Now to the important part, which is understanding directly from experienced acquisition experts and lawyers what actions you can take to protect your small business from a takeover.

We’ve asked professionals from a number of companies, and these are their top suggestions:

Make it unattractive to take control

Michael Buckworth, founder of startup-focused law firm Buckworths, argues that having provisions in place that force the buyer to purchase the whole company, could deter acquiring businesses. He says:

“It is standard to include tag-along and co-sale provisions that require a buyer of shares to (in the case of tag-along) make an offer to buy all the shares of the company. Or (in the case of co-sale) to buy the same percentage of each shareholders' shares as they intend to buy from the selling shareholder.

“This can make it much more expensive (and less attractive) for a buyer to take control as they may have to buy the entire company rather than just a majority share.”

Ensure you remain a private company

Ava Kelly, business expert at Love Energy Savings, suggests that by remaining a private company, you make it incredibly difficult for buyers to takeover your business without any form of negotiation, she says:

“As a business grows it is important to consider whether the company will be Private or listed on the Stock Exchange. Private companies can defend against takeovers relatively easily as the buyer must attempt to negotiate with the business owner.

“Companies on the stock exchange however are susceptible to takeover, depending on who owns the majority of shares and voting rights. Control of the Company can rest with those who do not hold the majority of shares but do hold the majority of voting rights. In either case a business is more open to a hostile takeover.”

Issue non-voting shares

Buckworth states that another effective way to protect your business from a takeover is through the form of non-voting shares for all non-founders. He says:

“The best way of preventing a hostile takeover is to retain control of substantially all of the voting rights. This can be done by the founders holding voting shares and all other investors holding non-voting shares.

“This is increasingly common for angel investors, the logic being that angels will always be minority shareholders and so don't get much benefit from voting rights anyway as they will never be able to block any resolution (at least alone).”

Include pre-emption on transfer provisions

This technique ensures any shares that can be sold must first be offered to existing shareholders, as Howard Watt, Partner at law firm Fladgate explains:

“UK private companies can structure themselves so that their shares cannot be sold (or new shares issued) without majority shareholder consent and additionally, even then, without first being offered to existing shareholders (a right of pre-emption).

“This places both statutory and contractual hurdles in the way of any potential acquirers.”

Avoid dilution

This relates primarily to listed companies and is the act of retaining a majority share of your business. But as Buckworth notes, for fundamental changes to be made a buyer must own 75% of the company. He says:

“There are two percentages of relevance for UK limited companies: 75% and 50%. Most people tend to think of losing control when they fall below 50%.

“However, to pass special resolutions (which are required to do major things such as change the articles of association – the document containing the rules of the company) requires in excess of 75% of the voting rights attached to shares.

“In a practical sense, if the founders can't pass special resolutions, they can't create new classes of shares, raise investment rounds, etc. So the easiest way to protect yourself is to retain more than 75% of the voting rights.”


Final thoughts

You should now be feeling more confident about how to deal with a hostile takeover situation should it arise. To recap, the best ways you can protect your business are:

  • Make it unattractive to take control
  • Ensure you remain a private company
  • Issue non-voting shares
  • Include pre-emption on transfer provisions
  • Avoid dilution

At the end of the day, whether you sell your business or not boils down to your goals for the future. If you’ve taken your company as far as you think it can go, maybe it is time for a new challenge…

Either way, Startups will be supporting you every step of the way. And if you decide to sell your company and are looking to kickstart your next venture, be sure to check out our best business ideas for 2022 for some inspiration.

Ross has been writing for Startups since 2021, specialising in telephone systems, digital marketing, payroll, and sustainable business. He also runs the successful entrepreneur section of the website.

Having graduated with a Masters in Journalism, Ross went on to write for Conde Nast Traveller and the NME, before moving in to the world of business journalism.

Ross has been involved in startups from a young age, and has a keen eye for exciting, innovative new businesses. Follow him on his Twitter - @startupsross for helpful business tips.

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