Not all business growth is organic.
For many small and medium-sized businesses, growth can also come via a merger or acquisition. By using this kind of strategy, your business can add services, people, product lines, geographic coverage, and more in one step.
If you’d like to grow your company via a merger or acquisition, read on for advice on how they work and which might be a better fit!
Definitions
Merger: A rare occurrence, when two separate businesses merge into a new, single entity. In this case, both companies benefit equally, and a new company name and brand are a result of the merger, instead of one company keeping its brand and name while the other does not. Both businesses will benefit from joining resources, and company CEOs continue to lead the company together, though sometimes in slightly adjusted roles.
A merger can be tricky to approach, as each company needs to be comfortable losing its existing brand. This can have a negative overall result and mitigation plans should be developed to prevent or minimize any impact. Integration of the two businesses that places them on equal footing can also be difficult to navigate.
Acquisition: When one company purchases another company and the purchased business is absorbed by the acquiring company. This approach to growth is more common, though still challenging. What the absorption of the acquired company looks like can vary widely. In some instances, some overall staff reductions may be needed, or leadership from the company being acquired could step down or change responsibilities. An acquisition can also give you access to a large amount of cash quickly or allow you to use your investment to accelerate your company’s growth.
Benefits
Whether through a merger or acquisition, there are many benefits of pursuing this sort of intentional growth, including:
- Expansion into new markets
- Adding new geographic territories
- Acquiring new technology
- Building new divisions of expertise
- Increasing intellectual property
- Solving a business problem with facilities or locations
- Increasing service lines
- Building out product lines
- Shoring up a succession plan
- Adding an influx of cash
If you are aiming to grow fast or fill some gaps of your business, you can pursue a merger or acquisition, whether you’re looking for one or many of these benefits.
Targets
While there are many pros to pursuing a merger or acquisition, it is a complex process, and finding the right company is the key component to such an endeavor.
When finding a target to acquire or merge with you should consider multiple facets, including financials, impact on your existing business, and cultural fit.
From a financial perspective, you should evaluate a possible target based on its enterprise value. Enterprise value includes calculating a company’s market capitalization, short-term and long-term debt, and cash on hand. Asset value that would be brought to your company is also an important consideration, as is possible resale value.
Research shows companies most likely to be acquired are fast growing and have high profitability and low liquidity.
Determining the impact on your existing company can include considerations such as the impact to the marketplace following the merger or acquisition, what the change will mean for your technology and operations, and how relationships with your vendors may shift.
Possibly the largest factor in considering such a move for your business is the cultural and strategic fit for you and your team. Trying to marry cultures that don’t fold together well can spell disaster for the future of a business, as can trying to integrate a brand that represents different values than yours.
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Approaching a merger or acquisition should be done with intention and careful thoughtfulness. If you’re looking to expand your company with greater growth than what can be achieved organically, you might consider acquiring a business or merging with another business, depending on the target company and the responsibility you’d like to have. You should consider everything from financial health to cultural integration to future strategy. The benefits could be many, from cash on hand, to a new territory or service, to solving a challenge you’re facing.
