Mergers and Acquisitions 101 for Small Business Owners

If you’re a small business owner or an aspiring entrepreneur, mergers and acquisitions probably sound like something that happens at an entirely different operational level from the one where you live and work. But if you’ve put the time into creating a business plan and invested hours in the health and welfare of your business, then it’s more than worth your while to learn the basics – it may even be the difference between your business’ success and its failure.

The reason for this is simple. No matter what size of your business, there are situations surrounding you that can impact profitability. Competition may arise, trends and consumer preferences shift, technology changes – all can lead to the need to merge, buy, or sell a business. Getting familiar with the terms and what types of scenarios may give rise to them is a smart step.

The Terminology

The first thing you need to understand is that mergers and acquisitions are terms that can cover many different types of events involving businesses large and small, local or international, with their commonality being that the purpose of all of them is to change a business organization in order to improve its operations, its relevance, and its revenues. The more you know about the different merger and acquisition options available, the better equipped you will be to make important decisions that will impact your ability to act in the best interest of the company you’ve already put so much of yourself into.

What is a Merger?

When two (or more) companies decide to merge, it means that they are joining their organizations together to take advantage of each of their strengths and minimize each of their weaknesses. A merger does not create an entirely new entity. In most cases, the merging businesses start out roughly the same size. Market share expands for all involved while the cost of operations diminishes, and in many cases, the merging companies are able to use their combined strength and goodwill to diminish the strength of businesses both have viewed as their competition. For a merger to take place, each involved company needs the approval of its shareholders and board of directors.

What is an Acquisition?

Where a merger combines two or more companies to create a new one, in an acquisition one company buys the other and absorbs it into its operations. The acquiring business is generally the one that is more profitable, and it continues to operate as it originally did, but with the additional control of the company that it has purchased. If the entire company is purchased, then the acquired company stops existing, while if only a portion of the company is purchased, the remainder will be unaffected.

What is Consolidation?

Consolidation is similar to a merger, but instead of the merged entities becoming part of an existing entity, the combination of assets, inventory, skills, and customer base create an entirely new entity where organizations that had previously competed against one another become a single collaborative organization.

When Should You Consider a Merger or Acquisition?

You may never need to consider a merger and/or acquisition for your business, but if you encounter any of the following types of situations, it may be something that worth entertaining.

• When trying to keep up has become overwhelming… then being acquired by another company for your goodwill, customer list, inventory and other assets may be an appealing answer. This is particularly true for companies that have fallen behind in innovation.
  

• When you’ve exhausted your ability to grow your business… then merger or acquisition may be your best answer. This is especially true if your business has expertise in a limited area and you want to expand your service or product offerings. By merging with another business that already has a built-in mailing list or customer base and expertise in the area that you want to grow into, both can benefit.
  

• When you want to blow past the competition… your best answer may be to simply eliminate them by acquiring them. An acquisition can be a risky business though, so make sure that you have both the capital and the ability to assume responsibility for an entirely new addition to your business. Many acquiring companies end up shocked that organizations in the exact same industry have marked differences in the way that they operate, in the assignment of responsibility within the organization, and in overall corporate culture. Make sure that you do your homework so that you are not caught unaware of the differences (and potential difficulties) you may face.
  

Professional Help is Essential to a Successful Merger and Acquisition

Merging businesses or acquiring a competitor is a complex legal process, and before moving forward with such a big transaction you want to make sure that all involved are going in with eyes wide open and aware of what they are getting into. Hiring an M&A advisor and having them work with your accountant is the most effective way to ensure that every detail is addressed, that valuations are correct, and that you are fully aware of all of the details and options that are involved. There are specific steps that you can take to make your business more attractive to a potential buyer, and things you want to look for in a company you are considering merging with or acquiring.

A merger and acquisition can deliver a profitable outcome for all involved if it is executed properly and with the right due diligence, but it can also be a disaster. Make sure that you go about it carefully and with the right expertise and support to make sure that it works out well for you.

If you have any questions or think your future may include some M&A planning, contact our office to discuss your options.