Integration for an Acquisition vs. a Minority Investment

During our last webinar, “A New Look at Due Diligence,” I fielded an intriguing question I’d like to share with you. I firmly believe that due diligence and integration fit hand-in-glove, so I was excited to receive this integration query.

Q: What are the differences, if any, in integration of a 100% acquisition and a 20-40% minority investment?

In a 100% acquisition, you need to consider which areas you will integrate and how that will take place. Integration is not a one-way street. You may change the seller’s practices to your own or your practices to the seller’s. You may even choose not to integrate some aspects of your business.

Think about branding, for example. Will the seller take on your brand name? Or maybe they have much stronger brand recognition in the marketplace and you will take on theirs.

The difference between 100% acquisition and minority investment is, of course, control. In a 100% acquisition you control all aspects of the company so you have a wide range of choice and can really integrate the two entities as little or as much as you wish.

For a minority investment, we have a different mindset. The focus is not so much “integration” as maximizing your influence on the evolution of the company you have bought into.  It is particularly important to think how you will manage the investment in order to achieve the outcomes you want, even though you don’t control the company.

There are two ways you can influence this outcome.

The first is to establish a well-written contract with the majority owner. If you have a minority interest, write a contract as if you had a strategic alliance – not an equity investment – with the company. This contract should make you feel confident your relationship with the majority owner and the direction of the company would be the same even no matter what your stake.

The second way is to use your equity position to influence the strategy and path of the acquired company. For example, as an equity owner, you may be able to influence the capital structure ─ the way the company gets lines of credit or financing.  Changing the balance sheet for the organization may significantly improve the way it performs in the desired marketplace

For minority owners the two key takeaways are: 1) Be confident in your relationship by establishing a contract, and  2) Increase the likelihood of success by influencing company strategy and integrating your capabilities.