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What are vertical and horizontal business acquisitions?

On Behalf of | Apr 29, 2024 | Business Law |

Through a business acquisition, entrepreneurs in New Jersey can expand their operations and increase their profits. However, acquisitions can serve different functions. Depending on your priorities, you may desire a vertical acquisition over a horizontal one, or vice versa.

The key difference between these types of acquisitions is the kind of company you end up purchasing.

Horizontal acquisitions

This acquisition allows you to buy a company that is similar to your own, operating in the same industry and producing similar products or services as your business. For example, if you own a restaurant chain, acquiring another restaurant chain would be a horizontal acquisition.

The primary goal of a horizontal acquisition is to reduce competition and gain a larger market share. By acquiring a competitor, you can consolidate resources, cut down on operational costs and potentially increase your pricing power.

Vertical acquisitions

By contrast, a vertical acquisition involves purchasing a company that operates at a different stage of the production or distribution chain within your industry. In other words, you are not purchasing a peer company, but rather a different business that can enhance your existing production.

You might choose a company that helps you at a particular production stage. You might acquire a supplier that provides raw materials or components for your products. Conversely, you can buy a business closer to the end consumer, such as a distributor or retailer.

Challenges for different acquisitions

The type of acquisition you choose can present its own hurdles to overcome. With a horizontal acquisition, you might make significant leadership changes to the acquired company. By contrast, you may keep a vertically acquired company more or less intact. Still, if you acquire a manufacturer or distributor, you should be aware of particular environmental and consumer laws that apply to your new business.

Both horizontal and vertical acquisitions present opportunities for business growth, but they have distinct goals and strategies. Choose the acquisition type that aligns with your long-term objectives.