Mergers and acquisitions. They aren’t just for Fortune 500 companies and big-time investment bankers.
Small and medium-sized businesses can also undergo and benefit from mergers and acquisitions. Often, business owners don’t know how to proceed with the purchase or sale of a company and don’t know who to turn to for help.
Like buying and selling real estate, merging with another company or acquiring their assets often requires the help of M&A professionals working on the business owner’s behalf to get them the best deal. Accountants, attorneys, bankers, and business growth consultants are a business owner’s M&A dream team.
Below, we’ll guide business owners through a brief M&A tutorial.
In a merger, two companies combine to form a new one. Mergers are classified in a couple of different ways:
Statutory–The target (company being bought) fully integrates into the acquirer and no longer exists. So, Company A buys Company B. They exist under one name, ‘Company A.’
Consolidation–Two companies join to become a new one.
Subsidiary–The acquirer now manages the target company.
Mergers are also classified according to the type of businesses that conjoin.
Horizontal–A business buys a competitor or related company. The acquirer might do this to achieve greater economies of scale, teamwork, and market share. One well-known example is when Chrysler and FIAT merged.
Vertical–One company merges with another within its production or distribution chain. A company might do this for the cost benefits of controlling part of its chain. One example is a coffee bean farmer purchasing a coffee distributor (forward integration) or vice versa (backward integration).
Conglomerate–A company joins with another outside its usual scope of core operations. General Electric purchasing aviation, finance, and entertainment companies is an excellent and well-known example.
In an acquisition, one company buys the other outright. The acquiring company may approach the target company to purchase it in a friendly takeover. Sometimes, the target company doesn’t want to sell. Then, the acquirer can pursue the target in a hostile takeover.
The terms have different meanings, but ‘mergers and acquisitions’ are generally used interchangeably.
Business owners hoping to purchase or sell can look for the following conditions and situations that make M&As highly desirable:
What primes a business for merger and acquisition success? Five attributes can make M&As happen more smoothly.
Mergers and acquisitions are significant financial investments with ups, downs, delays, and unpredictable costs. Businesses must also invest in research, legal fees, and integration expenses. A company can better withstand M&A processes if it has low debt, a healthy balance sheet, and steady cash flow.
A team with strong leaders, a clear vision, and the ability to execute ideas can identify a good deal, compromise on favorable terms, and guide a company through the M&A process.
A business must be able to support more extensive operations. From logistics to human resources and technology, a company will fare better during M&As when they can quickly scale up, reaping the anticipated rewards faster.
Agreements should align with the company’s long-term goals. What makes sense today should continue providing value into the future.
Economic stability, competitors, and industry trends factor into its M&A success, resulting in better terms, easier transitions, and swift progress.
Owners should start with professional business valuations, whether small, medium, or large, acquiring, merging, or selling.
Sellers often overvalue their companies, counting the sweat equity poured into them and the emotional attachment they have. Many M&A deals go nowhere because of valuation disagreements. A qualified valuation professional can help any business begin M&A activity.
Knowing the right questions to ask can prevent frustrations or stalled negotiations.
Buyers want to know things like:
Sellers want to understand:
Merging companies want to consider:
Mergers and acquisitions aren’t a ‘big company’ issue. Small and medium-sized firms must prepare for them, too. Retiring baby boomers and an ever-evolving economy create possibilities for industry consolidations and business acquisitions at every turn.
Professional advisors are essential in a business’s unique M&A scenario. Merger and acquisition processes are complex and risky. Business owners thinking of mergers and acquisitions down the road should form a team of accountants, attorneys, bankers, and business growth advisors with M&A experience to help them prepare. Preparation is the best ingredient for a successful M&A transaction.