Mergers and Acquisitions 101 for Small Business Owners

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

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 suppose you’ve put the time into creating a business plan and invested hours in the health and welfare of your business. In that case, it’s more than worth your while to learn the basics – it may even be the difference between your business’s success and its failure.

The reason for this is simple. No matter the size of your business, situations are 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 types of scenarios that may give rise to them is an intelligent 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. These can involve large, small, local, or international businesses. Their commonality is that the purpose of all of them is to change a business organization to improve its operations, relevance, and revenues. The more you know about the different merger and acquisition options available, the better equipped you will be to make crucial decisions. While you’ve put much energy into your business, those decisions can impact your ability to act in the company’s best interest.

What is a Merger?

When two (or more) companies decide to merge, they join their organizations 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, merging the two or more businesses starts as roughly the same size. As a result, market share expands for all involved while the cost of operations diminishes. In many cases, the merging companies can use their combined strength and goodwill to diminish the strength of businesses both have viewed as their competition. For a merger to occur, each involved company needs the approval of its shareholders and board of directors.

What is an Acquisition?

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

What is Consolidation?

Consolidation is similar to a merger. However, instead of the merged entities becoming part of an existing entity, they use the combination of assets, inventory, skills, and customer base to create an entirely new entity. As a result, 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. Still, if you encounter any of the following types of situations, it may be worth entertaining.

• If trying to keep up has become overwhelming, then being acquired by another company may be an appealing answer. Your goodwill, customer list, inventory, and other assets could be an advantage for them. This is particularly true for companies that have fallen behind in innovation.
• When you’ve exhausted your ability to grow your business, then a merger or acquisition may be your best answer. This is especially true if your company has expertise in a limited area and you want to expand your service or product offerings. By merging with another business with a built-in mailing list or customer base and expertise in the area you want to grow into, both can benefit.
• When you want to blow past the competition, your best answer may be to 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 are shocked that organizations in the same industry have marked differences in how they operate, the assignment of responsibility within the organization, and overall corporate culture. Ensure that you do your homework to not be 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. Before moving forward with such a significant transaction, you want to ensure that all involved are going in with eyes wide open and aware of what they are doing. Hiring an M&A advisor and having them work with your accountant is the most effective way to ensure that all details are addressed. This would include that valuations are correct and that you are fully aware of all of the details and options involved. In addition, you can take specific steps to make your business more attractive to a potential buyer—things you want to look for in a company you are considering merging with or acquiring.

With the right due diligence, a merger and acquisition can deliver a profitable outcome for all involved if executed correctly, but it can also be a disaster. So make sure that you go about it carefully and 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.