When you merge your business with another business or businesses, you consolidate two or more companies into one. You can compare a merger to a marriage.
The companies involved in the merger join their assets, staff and other resources together, forming a new legal entity. As with a marriage, things can go well for the newly merged company, or there can be difficult times ahead, depending on the communication between the businesses and the amount of preparation and planning you do before the merge.
It’s natural to have questions before you begin this process, such as:
- Should I sell my business to another business instead?
- Will I improve my business in a merger?
- What are the benefits if I purchase and merge a business with mine?
You are smart to want to get some answers before you proceed. Read on to learn more about how to merge or combine a business and the steps involved when you join two companies together.
An Overview of the Merger and Acquisition Business: Options for Mergers
One of the first steps when merging a business is contacting a Merger and Acquisition business. They will assist you in deciding what sort of merger will work best for you. If you already own multiple companies, you can choose to merge them into a single entity. Another option is to purchase an existing business owned by another individual or organization and join it with your own business. You can also sell your business to a larger company and have the larger company merge your business with its own.
The type of merger depends in large part on the connection or relationship between the two businesses before and afterward. A few types of business mergers include:
- Conglomerate Merger. A conglomerate merger takes place when two companies that have little or nothing in common join together. For example, a technology company might merge with a healthcare company. Although at first a conglomerate merger might seem to make little sense, it can reduce business risk for the companies involved by diversifying their industries and allowing each to grow. While the two might appear unrelated, in some cases, they can support each other with their products and services.
- Horizontal Merger. During a horizontal merger, two companies that offer identical or very similar products or services come together. Usually, the two companies are competitors and reach the same demographic or market. An example of a horizontal merger would be if two primary care medical practices joined together or if two software companies merged. Horizontal mergers decrease competition for the companies involved and reduce waste and inefficiencies within the businesses.
- Vertical Merger. Like a horizontal merger, a vertical merger brings together two companies in the same industry. Usually, the companies focus on different areas or stages of the production process. For example, a construction company might merge with a lumber company or a fashion label might merge with a company that produces fabric.
- Concentric Merger. A concentric merger can occur between two companies that have a similar or identical customer base but produce different products. For example, a software company can merge with a company that builds computers or other pieces of hardware.
Purchase Vs. Consolidation Merger
Another factor to consider when merging your business with another or joining two of your companies together is how the sale of the businesses will be structured. Typically, you have two options when it comes to financing a merger.
With a purchase merger, Company A buys Company B, forming a single entity. With a consolidation merger, a third company is created that purchases both Company A and Company B, and the two form a new entity, Company C. Our Merger and Acquisition team is equipped with the knowledge to help this process run smoothly.
How Mergers Are Different From Acquisitions
The word merger is often used alongside the word acquisition when it comes to buying or selling businesses. But it’s important to understand that a merger is fundamentally different from an acquisition. During a true merger, two companies form a new entity by combining their teams and resources.
During an acquisition, one company buys the other company and brings it into its fold. The acquiring company doesn’t experience much, if any, change. If two companies merge, though, there is usually a considerable amount of change for both, including a reorganization of their staff and operations. We specialize in both merger and acquisitions because of our experience buying and selling businesses.
Why Should I Merge My Businesses?
If you currently own two or more businesses, merging them into a single entity can make sense. For one thing, when you join your businesses together, you create synergy, which stems from Greek root words that mean “working together.”
Combining multiple businesses into one can mean the strengths of one business compensate for the weaknesses of the others. The joined companies bring together their assets and resources, allowing each other to weather any storms that arise.
Additionally, merging your businesses can help you achieve growth. On their own, your companies might have struggled to move to the next phase or to scale. But together, they are more likely to reach a larger audience or increase production, especially if they were similar companies to begin with.
In some cases, merging your businesses means less work and stress for you. Instead of having to juggle two, three or more companies, you become responsible for a single business that operates in a variety of niches or industries.
The Pros and Cons of Merging a Business
When deciding if the decision to merge multiple businesses together is the right one for you and your companies, it helps to examine the pros and cons of mergers. Understanding what’s at stake and the potential advantages your decision can have will help you choose the right option for your businesses. Let’s take a look at the pros of merging a business first.
1. Mergers Can Minimize Competition
One of the biggest advantages of merging two companies, especially if the merger is a horizontal or vertical one, is reducing competition. When two companies that operate in the same industry or offer the same product or service join together, they no longer work against each other but instead work together. The merged companies, acting as a single, larger entity, can then claim a more substantial portion of the market they operate in than they would if they continued to operate as separate businesses.
Although at first glance, it might seem that a reduction in competition would only benefit the two merging companies and not the customers they serve, that isn’t always the case. For example, if two competing cell phone network companies merge, customers can take advantage of a larger network that offers more coverage compared to the two network companies on their own.
In some cases, reduced competition means streamlined services. If two transportation companies merge, there might be fewer buses on the road at any one time. But that can also mean there is less congestion and less confusion for passengers, allowing them to get where they need to go with greater ease.
2. Mergers Can Save Money
Mergers can mean a reduction in costs, saving businesses money in the end. When two companies merge, they often no longer need to rent two separate office spaces, for example. They can combine marketing efforts to save money on advertising and other forms of promotion. Depending on how the companies are restructured after the merger, it can mean a reduction in the cost of staffing as redundant positions are combined or otherwise eliminated.
3. Mergers Can Improve Efficiency
Merging two companies can diminish redundancies and improve efficiency all around. For example, when two or more companies merge together, there is no longer the need for each to have its own marketing department, its own research and development department, and so on. The departments can join together working toward a common goal.
4. Mergers Can Increase or Grow a Company’s Customer Base
Company A might have reached customers in one age bracket or demographic while Company B connected with customers in a completely different age bracket or demographic. When the companies come together, Company A gains access to Company B’s customers and vice versa. The merger can allow a company to tap into a new customer demographic without having to do the legwork usually required, such as research and marketing.
5. Mergers Can Introduce a Company to a New Market
Let’s say Company A serves customers in one part of the U.S. while Company B has worked with customers in another part of the U.S. Usually, setting up in a new market means a company has to undertake a considerable amount of research beforehand, including:
- Looking for employees
- Finding a location for an office or headquarters
- Putting out marketing feelers to determine if that market is ready for the service or product offered by the company
But when two companies that serve different areas merge, there’s no need for extensive research, as Company B already has a track record of reaching customers in the area not served by Company A.
6. Mergers Can Increase Business Intelligence
When two companies merge, each one can take advantage of the experience and intelligence of the staff at the other. For example, Company B has developed an effective way to retain customers or to follow up with customers after an initial sale, increasing the chance of a repeat sale. Instead of having to do its own investigation, Company A can use the method developed by Company B after the merger.
Additionally, a merger can introduce the two companies to new ways of approaching or thinking about problems. Issues that might have confounded Company A might resolve after a merger with a recommendation from a person from Company B.
The Cons of Trying to Merge and Acquire a Business
Although a merger can offer many benefits to a company, it isn’t without its disadvantages. Take a look at some of the cons of combining businesses.
1. Mergers Can Create Culture Clashes
One of the biggest concerns business owners have when merging two companies is how the cultures of those companies will mesh together — or not mesh together. Culture clash can be common after a merger, especially if the two businesses have very different ways of managing employees or different expectations when it comes to employee behavior.
While culture clash can interfere with a merger or make things particularly challenging after companies combine, it is not inevitable. Businesses concerned that there might be some difficulty managing or combining expectations can take steps before the merger is final and afterward to help their teams get used to new rules and expectations. Being prepared for downsides in an acquisition is an important factor to plan for.
2. Mergers Can Cause Employee Shake-Ups
Even before an announcement that companies are merging, employees can get skittish and nervous about their jobs. In some cases, their apprehension is justified, as a merger can eliminate positions when employees at both companies end up being laid off.
In the interim, fears of a merger and the effect it might have on employment can interfere with employees’ ability to do their jobs. A business might see a drop in employee productivity as people fear for the future or feel less motivated to work for the company. In some cases, employees might decide to move on and find work elsewhere, meaning a company ends up losing most of its core team in advance of a merger.
3. Mergers Can Mean More Liability
Depending on the number of debts owed by the companies coming together, a merger can mean an increase in overall liability, which can interfere with the newly created company’s ability to get more or new credit. The increased liability might cause initial difficulties to overcome but the increased time and efficiency will ensure the effective growth of both of your business.
Weighing the Pros Vs. the Cons of a Merger
Any time you make a decision in business, there are going to be benefits and drawbacks. The critical thing to do is to examine the pros and cons of your choice carefully and determine whether the pros outweigh the cons or the cons outweigh the pros.
In the case of merging businesses, the benefits often outweigh the disadvantages. Most of the cons of a business merger can be overcome or managed with careful advanced planning. For example, you can take steps before the merger to help your company’s cultures come together rather than clash. If either of the businesses is in debt, they can work on reducing the amounts they owe before a merger so that each one is on a sturdier financial footing.
The benefits of mergers often emerge in places you don’t expect. Innovation flourishes when two companies come together. A business merger can lead to the development of new products or services.
For example, before merging, Company A might offer one product and Company B another. After a merger, the new company might realize it can blend two separate products into one to better meet the needs of customers. Or it might be able to take components from each of their products and combine them to produce something entirely new. These pros make a strong case to consider business mergers.
Steps to Merging a Business
The process of purchasing and merging a business might take longer than you expect it to, for several reasons. Knowing what to expect and the general steps involved when working on a merger will help you be prepared for any potential surprises that crop up during the process. Our professional brokers have experience with a multitude of industries ranging from technology businesses and healthcare industries to construction and engineering businesses. We will be there to help you through these steps. Taking your time and doing your due diligence throughout the merger will also help you avoid any disappointments once the ink is dry and the deal is finished.
Step 1: Assess the Health of the Companies Involved in the Merger
Before you and the other businesses can move forward with a merger, it is important to take the temperature of the companies involved to make sure that they are financially healthy enough to go through the merger process. One thing to examine is the liquidity of each company involved, to determine if the businesses have enough capital to complete the merger transaction and enough capital to stay afloat once it is over.
It is also important to perform due diligence on the companies involved in the merger. Learn as much as possible about each company, including their respective strengths and weaknesses and how they are perceived, both by people who work there and by customers and others in the community.
During due diligence, it would be a good idea to take a look at reviews of the company posted online and at any press concerning the business.
Step 2: Set Goals for Your Merger
Once you’ve confirmed that the companies involved are in good shape and that a merger would do more good than harm, it’s time to consider what you want to get out of the merger. Why are you even considering a merger in the first place?
Knowing what your goals are for the merger will help you determine which type will be best for your business. Here are a few questions you can ask to help you set your goals:
- Are you looking to build up your customer base or expand into a new market?
- Are you hoping to reduce costs? If so, by how much and in what areas?
- Do you want to streamline your company’s processes and workflow?
- What is the competition like in your industry? How can you level the playing field or reduce competition?
- Do you plan on developing new products or services in the future?
Step 3: Assemble a Team to Help You Through the Merger
Our merger and acquisition specialists will help you and your team and will make sure the merger stays above the board and works for both parties. We will also help you create and negotiate the letter of intent which outlines the details of the payments and structure of the deal. It can also be a good idea to have an accountant on your team who can review your finances. We can recommend attorneys, banks, and accountants that have experience in completing mergers and acquisitions.
Step 4: Determine the Terms of the Merger
During step 4, it’s time to figure out the fine details of the merger. Will all the companies involved change their names, operating under a unified title? Or will one company keep its name and the rest change theirs?
Other things to consider include how much information to reveal to each company and when to do it. Will the combined companies be privy to each other’s trade secrets, and if so, when will those be shown and who gets to see the information?
Another thing to consider is what will happen if the merger goes south. Your companies might want to have exit strategies in place in case things don’t work out and the best option is to part ways before you sign the paperwork.
Step 5: Create a Purchase and Sale Agreement
One of the responsibilities of your attorney will be to create a purchase and sale agreement for the merger. Based on the Letter of Intent you will already have the basic outline of the deal, however the purchase and sale agreement will be more detailed. The contract should include the following:
- The names of the companies involved and their respective owners
- The assets and liabilities of the companies involved
- The conditions of the sale/merger
- How the merger will be financed
- The total price of the merger and what is included in the price
- An explanation of how the businesses will operate/run until the merger is finalized
- A statement explaining the sale agreement is dependent on the outcome of inspections and financing
Step 6: Put Together an Internal Merger Transition Team
The transition team is the group of people who will handle the process of helping the two companies merge inside of your business. They might work to find solutions to cultural clashes and can provide leadership to the companies as they work on joining together.
It’s important that the transition team include people from all of the businesses involved in the merger, preferably people who have leadership or management experience and who can see what is happening in the day-to-day operations of the businesses and respond to situations quickly and appropriately.
Step 7: Make the Required Changes Post-Merger
A merger can mean two or more companies end up starting fresh, with a new name, new bank accounts and new licenses and permits, as needed. If the companies are effectively shutting down to create the new, merged businesses, the businesses will most likely need to file certain forms with their state or city’s department of revenue.
Step 8: Work Through the Integration of the Companies
Even once the sale is finalized, and the tiny details have been seen to and adjusted, the merger isn’t complete. The last step is to focus on integrating the businesses, which can involve a fair amount of trial and error. You might find adjustments and course corrections are needed throughout the integration, as employees get used to new ways of working and the transition team comes up against unexpected obstacles.
Managing the Merge Internally
From the perspective of employees, one of the biggest drawbacks of a merger might be the potential for culture clash after the deal is finalized. Bringing together employees who have different expectations when it comes to behavior, performance and socializing can often be a recipe for disaster.
Along with paying attention to how the merger will affect your company externally, it’s essential you have a plan in place to make sure the merger goes smoothly internally. Here are a few ways to do that.
Assess Your Differences
The first step to managing the merge internally is to examine how the companies’ cultures differ. It might be that one company is very formal and the other very laid back and casual.
For example, Company A might expect its employees to wear suits while Company B might allow jeans and short-sleeved shirts. How can you address that difference? One option is to loosen the dress code and ask employees to wear business casual clothing most days and maybe allow for a casual day once a week. Those who still want to wear suits are welcome to do so, and the people used to more casual dress still have a chance to relax once a week.
Cultural clashes reach beyond dress codes and socializing. Some companies have a stricter management style than others. That can come as a shock to employees who are used to a more laid-back approach to task delegation and oversight. On the flip side, employees who are used to a strict management style might feel unmoored or confused when they don’t have someone continually looking over their shoulder.
The best way to handle differences in management style is for the leaders of each company to sit down together before the merger and develop a new way of working with their teams. The management style can combine the best of both worlds. It will take some getting used to by everyone on the team, but implementing a mutually agreed upon management technique will help employees from both companies avoid feeling resentment.
Get Employees on Board
It’s important to get your employees on board with the changes facing the company. Otherwise, you might find yourself not only merging two companies but also having to fill several newly vacant positions. Give your team members a chance to share their opinions.
It might be that an employee has an excellent idea for a change to make and that the merger provides the ideal opportunity to put that change into practice. Checking in with your team and asking for their thoughts and advice a few months after the merger has taken place will allow you to see where there are significant issues or where there is room for improvement when it comes to reducing culture clash.
Partner People Up
Another way to help the newly merged companies feel like one united business is to pair together employees from Company A with employees from Company B. They can work together and otherwise serve as mentors or advisors to each other as your companies go through the merger process. Regularly communicating with a person from the “other side” allows employees to get a better sense of why the other company does things a certain way.
Figure Out What Stays and What Goes
Merging businesses often create redundancy. One of the challenges of a merger can be deciding who or what gets to stay and what should go when the ink has dried, and the deal is finalized.
Although it can be easy to get emotional during this part of the process, it’s important to approach it with a level head and an understanding that it’s just part of doing business.
In the case of employees, joining two companies together is means there are two people hired to do the same job. Deciding which one to keep and which person to let go can be a challenge, which is why it’s important to look at performance and track record rather than how much you like a person.
Along with having to decide who to lay off and who to keep after a merger, your business might need to choose to close an office or location or to stop offering certain services, depending on how well those services work with the newly meshed company. Again, these can be difficult decisions to make, which is why it helps to look at them through a lens of logic and reason rather than through a lens of emotion and sentiment.
Managing the Merge Externally
Along with overseeing the merger internally and addressing the concerns of your employees, you can decide how and when to announce the merger to the public and maintain some control over who finds out about it and when. You also want to think about what name your company will be known as after the merger. This is a massive branding opportunity that will propel your business into the spotlight and lead to overall growth.
Rebranding After the Merger
A merger can be an ideal time for your companies to consider a rebrand. When you join together, you’re no longer Company A and Company B. Instead, you’re Company X, a business that might provide an entirely new type of product or service to a new market or customer demographic.
Rebranding after a merger can make sense for all the companies involved, rather than having one company assume the name of the other company. First, a rebrand lets the public know something is different and each business isn’t just doing the same old thing. Second, a rebrand can give your united companies a fresh start.
That said, it might be a good idea to include an explanation of who your company is and what it used to be, at least at the beginning. You don’t want to confuse your respective customers.
Keeping Both Names
Often it can be good to keep the name of the acquired company while still adding the name of the acquired company. For example. You can have XYZ, Inc (An ABC Company). This will allow you to keep both names that people are familiar with and add the strength of a larger company to the known niche brand of a smaller company.
Sync Your Social Media and Websites
In today’s world, it’s not enough to change the name of your business. You also want to update your company’s website addresses and social media profiles. Create a new URL, or website address, for the merged company and have the old URLs automatically redirect to the new site, so people can find you with ease.
It’s also a good idea to create new social media pages for the new company. Include a notice on the pages or profiles of the merged companies, inviting people to like or follow the new page.
Market Your Newly Formed Business
A merger can be an excellent time to check in with past customers and let them know what’s going on. If some customers haven’t worked with your company in a while, the merger can serve as an ideal opportunity to offer them a promotional discount and convince them to give the new, improved, united company a try.
Another way to promote a rebrand or to announce the newly merged company is to hold a launch event. Depending on where the company is, you might have them in several different cities or even have one online, such as a live video tour of the new headquarters or a Q&A with the leadership team. During an in-person launch event, your company can give away freebies, such as T-shirts with the new logo on them or other fun, inexpensive promotional products.
Managing the Merger Financially
A merger should make financial sense for the companies involved. A merger shouldn’t be seen as a way for one business to bail out another. Instead, it should be an opportunity for both businesses to grow.
That will require frank conversations between your company and the one you are looking to merge with. Everyone should enter the deal with clear eyes, knowing what needs to be done for the deal to achieve financial success.
To manage a merger from a financial standpoint, look closely at the income, cash flow and balance sheet of each business involved. Examine the statements from each company individually, then combine them to get a sense of how merging the businesses would increase income or improve cash flow. It might be that one company’s cash flow is so unstable it drags down the second company. Or income from the second company could compensate for high expenses from the first.
You should look for ways you can save money. Your expenses should not be the sum total of each individual company’s pre-merger expenses. You will find many ways to reduce the amount you spend, by doing things such as:
- Combining departments like human resources or information technology. You may need to lay some people off, but you can also consider retraining them to serve other roles in your expanded company.
- Reducing your real estate can save money almost immediately. Decreasing from two locations to one may even make some money if you can sell the building that housed the company you acquire.
- Redistributing capital expenditures can also lead to savings. You may find Company A has a bunch of laptops it never distributed to employees, meaning Company B does not have to invest in new technology.
Finally, pay attention to your credit rating and monitor changes as you go forward. This is something any company should watch, but it’s even more important for ones that recently merged.
Merge Your Business Without Difficulty: Contact Synergy Business Brokers
Whether you are considering merging two businesses you own together or are looking to purchase and merge with another company, the process doesn’t have to be difficult. You can work with a team of mergers and acquisitions brokers who can ensure you get the best deal and value possible for your business and that the agreement is favorable for you. You don’t want to lose money in the merger process nor do you want to end up with terms and conditions that don’t work for you.
A merger might be the best move you can make for your company. Although the process of merging businesses can be long and drawn out, it doesn’t have to be stressful or challenging. Contact Synergy Business Brokers today to get the merger process off to an excellent start and reach a deal that benefits you.