Mergers and Acquisitions — A Powerful Tool for Small Businesses
Many situations exist in which a small business considers a merger or acquisition (M&A). Generally, entrepreneurs consider this type of transaction when they are ready to expand or gain a competitive advantage in their industry. Most commonly, firms enter M&A agreements to increase income and grow market share. Through a successful merger or acquisition, the company may reach a wider audience and increase its market share.
In some cases, a small business may be unable to compete with larger, better-resourced companies in the same industry, or innovations and technology may outperform them. When this happens, the best chance for survival may be selling to a more successful company. On the other hand, sometimes a successful company may feel the best way to eliminate a competitor is to purchase the competing company. This can be an effective strategy, provided the acquiring company considers integrating the two company cultures and streamlining operations.
Before pursuing a merger or acquisition, business owners should understand the difference between the two concepts. A merger occurs when two existing businesses form a new single legal entity. In these cases, both business owners have agreed to combine companies to gain some advantage such as reduced costs, expansion of the geographical area, or increased market share. When the merger involves larger companies, the boards of directors typically must approve the merger and secure approval from shareholders.
Theoretically, the merging companies are equivalent in earnings, making the deal a so-called “merger of equals.” However, this type of merger does not frequently happen, as it is uncommon for two equal companies to gain advantages from joining resources, including staff and executive leadership. In any case, when a merger occurs, the two original companies no longer exist.
Acquisitions do not create a new entity but involve the absorption of one company by another, in some cases through the liquidation of the acquired company. Unlike mergers, acquisitions essentially equal the purchase of one company by another. Typically, they are not between equal partners but between a more profitable company and a less profitable company. The more profitable company purchases some or all the shares of another company to gain control of some specific aspect. If the acquisition involves the purchase of the entire company, the acquired company no longer exists but becomes part of the existing firm.
A third option is a consolidation. Like a merger, this agreement results in forming a new company. However, unlike mergers, which often involve larger firms, consolidation can be advantageous for smaller companies seeking to increase buying power and improve their financial standing. For small businesses with limited resources to meet client needs, consolidation can result in better deals and more clients. A consolidation combines the assets and liabilities of both parties to increase profitability and combine two competing firms into a new enterprise.
Before embarking on a merger or acquisition, parties must conduct a business evaluation to determine the value of each business. A qualified business appraiser and reputable M&A advisor can provide an objective outside perspective, helping both companies gain a clear idea of how they may benefit from the transaction.
Additionally, purchasing companies will need to carefully consider financing options to ensure they can afford an acquisition. Overall, mergers and acquisitions are powerful strategies for businesses of all sizes, provided they are entered with preparation and foresight.
