When Mergers and Acquisitions Make Sense

Out of the blue, you’re approached with what sounds like a great deal, almost too good to be true. An owner of a company in a similar industry wants to merge. You’ve been thinking about how to boost your flat-lining sales. Could this be the solution?

A merger or acquisition can be the perfect answer to issues around growth or exit planning, but exploring them can also cause more problems than they solve, wasting both time and money. How do you tell the difference? First, understand the beneficial reasons to consider mergers and acquisitions (M & A). Second, learn and avoid mistakes commonly made by businesses when considering M & A.

If you’re considering a merger or acquisition, being proactive rather than reactive gives you the most control and keeps you in the best position for negotiations. Typically, your main motivation to even consider a merger or acquisition is to fuel growth or fuel your exit. Understanding yours and your company’s goals and needs in relation to these motivations before approaching an M & A situation is your best strategy.

Fueling Growth

Most companies seek development – organically or by acquisition. When considering expansion, many keep their focus a little too broad by simply thinking that they want to increase profits. Strategically, it is important to dive down into the three main areas of growth and determine which one (or which combination) will drive opportunities for financial impact.

  • Process: A merger or acquisition is effective when the sophisticated systems at one company will benefit the other and when acquiring those processes will be more efficient and cost-effective than developing them on your own.
  • People: A merger or acquisition may be wise when hiring and training people will be more costly and time-consuming than acquiring the talent the other company has already developed.
  • Product: The cost and time involved with expanding a product line can be prohibitive. Merging or acquiring another company that is already successfully manufacturing and/or selling those products can be the optimal solution.

Fueling Your Exit

If you’re not planning on gifting or selling your company to family or other team members, a merger or acquisition may be the exit plan that provides you with the retirement you’re seeking. Having a plan in place for the change of ownership ensures that you secure a desirable deal to reach the financial goals you set for yourself and your family. Achieving financial objectives and a smooth transition of ownership occurs when the business owner plans in advance, takes the time to view the business from the perspective of a prospective buyer, and makes changes necessary to make the business more marketable and desirable to buyers.  The value of your business will be determined based on anticipated future cash flow of the operations.  Fully examining your operations and “getting your house in order” ahead of time is key to securing the valuation you may seek.

Another benefit when considering a merger or acquisition is that, even if the deal does not go through, you will have learned a lot. First, the next time you consider a merger or acquisition, you and your team have a much better understanding of the process and can manage it more quickly and cost-effectively. Secondly, the process teaches you a great deal about your business. Looking at your organization through the eyes of someone considering you for a merger or acquisition gives an entirely new perspective on your businesses. This perspective can help you to identify changes that will make your business even more appealing in the next opportunity, like securing non-compete agreements with key employees.

If you are considering a merger or acquisition, be sure to seek legal and financial advice before connecting with potential new business partners. As you’ll read in next month’s blog post Six Mistakes Companies Make When Considering Mergers & Acquisitions, the biggest mistake companies make is to move far along in the process before seeking legal and financial advice.

 

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